City University of New York (CUNY) City University of New York (CUNY)

CUNY Academic Works CUNY Academic Works

Publications and Research Baruch College

2018

Corporate Governance & Sustainability of the Global Value Chain: Corporate Governance & Sustainability of the Global Value Chain:

Bangladesh Ready-Made Garment Industry Post-Rana Plaza Bangladesh Ready-Made Garment Industry Post-Rana Plaza

investigation into fairness of value appropriation by global apparel investigation into fairness of value appropriation by global apparel

brands, manufacturers and labour brands, manufacturers and labour

Yoshiteru Uramoto Sophia University

Lilac Nachum Prof CUNY Bernard M Baruch College

How does access to this work benefit you? Let us know!

More information about this work at: https://academicworks.cuny.edu/bb_pubs/1093

Discover additional works at: https://academicworks.cuny.edu

This work is made publicly available by the City University of New York (CUNY). Contact: AcademicWorks@cuny.edu

1

Corporate Governance & Sustainability of the Global Value Chain:

Bangladesh Ready-Made Garment Industry Post-Rana Plaza investigation into fairness of value appropriation by global apparel brands,

manufacturers and labour

Yoshiteru Uramoto

Distinguished Professor

Centre for Global Discovery, Sophia University, Tokyo

Lilac Nachum

Professor of International Business

Baruch College, City University New York, New York, NY

Sophia University, Tokyo Japan, 2018

2

Summary

On 24 April 2013 more than 1,100 people died in the Rana Plaza garment factory collapse in Bangladesh.

TV cameras focused on the victims of this horror – the garment workers, their unsafe and pitifully low

incomes. Improvements were promised, by the factory owners, their international buyer customers,

Bangladesh Government and civil society groups. This study sought to examine to what extent these

promises had been delivered upon. Bangladesh is the world’s second largest exporter of ready-made

garments. The industry has played a central role in the country’s economic development and poverty

alleviation. It is widely agreed that labor safety and fair compensation are essential for the long-term

sustainability of the industry. A global team of researchers created a framework for evaluating the way

value is created and appropriated in the global garment industry, focusing on Bangladesh as the producing

countries and the world’s largest global brands. The research team found that in Bangladesh significant

value is being created through low production costs but these gains are disproportionately benefiting

Bangladeshi manufacturers and Western consumers, rather than Bangladeshi workers. Current

Government measures fail to rebalance this inequality, posing a threat to the long-term sustainability of

the industry. The study recommends that the Government reviews its policies. It should provide

incentives for the manufacturers to shift from low cost production to skill upgrading as part of a long term

industrial policy of development and sustained growth. Global apparel brands also have a role to play.

They should support the enforcement of unionization rights, prevent union-busting activities and ensure

that the factory owners - their suppliers – adhere to international laws and standards.

Key words:

Garment global supply chain, sustainability of global supply chains, Bangladesh, value creation, value

appropriation, labour conditions, minimum wage, government policy, work conditions and safety

3

Table of Contents Table of contents

List of tables

List of figures

Appendices

Acknowledgements

Rationale for the Study

Executive Summary

Chapter 1 Introduction Corporate Governance and Focus of the Study

Study Contribution to the Implementation of the SDG and CSR in Global Supply Chains

The Global Garment Supply Chain The History of Bangladesh’s Ready-Made Garment Industry and its Current Status

Chapter 2 Conceptual Framework of the Analysis

2.1 Salient Differences Between Value Creation and Value Appropriation

2.2 The Participants in Global Supply Chains: Lead Firms and Other Participants

Chapter 3 Findings of the Analysis of the Garment Supply Chains

3.1 Value creation

Cotton Growers Textile Producers

Accessories Producers

Garment manufacturers The Nature of the Business

The Local Value Chains

The Production Process

Cost of Value Creating Activities

Lead firms

Brand Management

Demand Forecast

Management of the Circulation of Merchandise in the Supply Chain

Sales and Pricing

Supply Chain Management

Risk Management

Corporate Governance of the Supply Chain 3.2 Value appropriation

Manufacturers

Lead firms

Variations in Value Appropriation

4

Case Studies: Successful Garment Producers of Bangladesh

Lessons learnt:

Investment in quality of personnel is a key factor for success

Investment in new technology helped increase productivity

Investment in research and creativity

Maintaining quality of product is a key factor

Bangladesh’s RMG has reached a level where some firms are price-setters, not

price takers

Business relationships with buyers and retailers resembles partnerships

Factory compliance is a precondition to success

Case Study: A Successful Global Brand–H&M

The Choice of H&M

H&M in Bangladesh

Caveats and limitations

3.3 Industrial Variations and Value Appropriation by Consumers

3.4 Widening Gaps between Productivity and Wages

Chapter 4 Recommendations

4.1 Recommendations for Bangladesh’s manufacturers

Governance and Transparency

Speed and Flexibility

State-of-the-Art Technology

Cost and Efficiency

Learning

4.2 Recommendations for Bangladesh’s Policy Makers

Differentiate Bangladesh as a Globally Competitive Location for Garment

Production

Seek Low-Cost Access to Export Markets

Facilitate Consolidation: Differentiate Bangladesh in Size and Scope of Garment

Manufacturers

Facilitate Manufacturers’ Upgrade to Higher Value-Added Activities

Data and Information

4.3 Recommendations for Lead Firms

Increase Value Creation

Turn the Supply Chain into a Source of Competitive Advantage

Develop Close Partnership with Bangladesh’s Manufacturers

Actively Manage Information Flow in the Supply Chain

Chapter 5 Conclusions

5.1 Future Research

References

Appendices

5

List of Tables

Table 1. Growth of Bangladesh’s RMG Export and Market Diversification

Table 2. Employment in Bangladesh’s RMG Industry

Table 3. Value Creation and Value Appropriation: Defining Features

Table 4. Size Differential Among Participants in Global Supply Chains

Table 5. Locally Purchased Fabric by Bangladesh’s Garment Manufacturers

Table 6. Cost Breakdown of Value Creation Activities: Bangladesh Manufacturers

Table 7. Brand Value: World’s Largest (by Brand Value) Apparel Firms

Table 8. Cost Breakdown of Value Creation Activities: Lead Firms

Table 9. Value Creation in the Garment Industry

9a. Bangladesh’s Manufacturers, Value Added per Establishment

9b. Value Added by Lead firms

Table 10. Value Appropriation in the Garment Supply Chain: Profit Measures

10a. Bangladesh’s Manufacturers, Average per Establishment

10b. Profit Measures of Lead Firms

Table 11. Profile of Case Study Firms: Garment Manufacturers in Bangladesh

Table 12. Value Appropriation in Global Supply Chains: Selected Industries

Table 13. Wages of Garment Workers in Bangladesh

13a. Statutory Minimum Wage Without Market Adjustments

13b. Estimates of Prevailing Wages by Grade

Table 14. Value Creation and Value Appropriation in the Garment Supply Chain

List of Figures

Figure 1. Value Creation and Value Appropriation in Supply Chains

Figure 2. Ready-Made Garment Supply Chain

Figure 3. Value Chain of Denim Jeans

Figure 4. Value Chain of Cotton T-Shirt

Figure 5. Value Chain of Woven Shirt

Figure 6. Value Creation Activities of Lead Firms

Figure 7. Consumer Price Index: Apparel versus the Economy as a Whole

7a. US

7b. EU

Figure 8. Labour Productivity and Wages

Figure 9. Productivity of Bangladesh’s RMG Manufacturers Productivity, 1983-2015

Figure 10. Bangladesh RMG Industry: Number of Establishments and Establishment Size,

1984-2015

Appendices

Appendix 1. Profile of the World’s Largest Apparel Firms

Appendix 2. US Wages, Selected Fashion and Apparel Occupations

Appendix 3. Custom Clearing Cost for RMG Products

Appendix 4. Size of Lead Firms’ Global Retail Networks

Appendix 5. Retail Rental Prices, World’s Major Cosmopolitan Centres

Appendix 6. Corporate Tax Rate Paid by Lead Firms

Appendix 7. Case Studies of Successful Garment Manufacturers in Bangladesh

Appendix 8. Expenditure on Apparel, % Total Consumers’ Expenditure:

8a. US

8b. EU

6

Acknowledgements

This report was prepared under the leadership of Yoshiteru Uramoto, Distinguished Professor,

Centre for Global Discovery, Sophia University, Tokyo Japan and former Regional Director of the

ILO Regional Office for Asia and the Pacific. Lilac Nachum, Professor of International Business

at City University New York, wrote the report in consultation with Yoshiteru Uramoto. Dr.

Nazneen Ahmed, Senior Research Fellow at the Bangladesh Institute of Development Studies

(BIDS), provided inputs on Bangladesh garment industry.

The research team acknowledges with deep gratitude illuminating discussions during the course

of the work on this project that have been instrumental in deepening the understanding of the

garment industry and its supply chain, and that have helped shape the ideas of this study. The Team

appreciates the valuable advices given by Mr Kazuo Tase, CEO SDG Partners, Inc. Japan and Ms

Mayo Suzuki during the course of the project.

Thanks go to Mr Srinivas Reddy, former ILO Country Director, and the leadership of Bangladesh

Garment Manufacturer and Exporter Association (BGMEA) President Siddiqur Rahman and

Senior Vice President Faruque Hassan for their support of our work, which was pivotal in

introducing us to the Bangladesh garment industry. Mr Nur Mohamman Amin Rasel, Joint

Secretary Trade Promotion of the BGMEA, provided indispensable assistance with data collection

and interpretation regarding the Bangladesh garment industry. We also thank the participants in

the BGMEA and Bangladesh Institute of Development Studies (BIDS) workshops in Dhaka for

thoughtful comments on a preliminary draft of the study.

The Research Team acknowledges with gratitude the benefits to the report of the expertise of Elida

Behar, Sharon White, Herbert Frichner, and Margaret Bishop, professors at the department of

Fashion Business Management of the Fashion Institute of New York. Professor Rubin Sackin, the

head of the department, offered generous help in connecting with experts. Very special gratitude

goes to Akintola Owolabi, Accounting professor in the Lagos Business School, for excellent

guidance on the accounting intricacies of our analyses, as well as to Mr Jordan Pious, manager at

A.T. Kearney and a prolific writer for Apparel Magazine, for introducing us to the intricacies of

the global garment supply chain and generously sharing his vast knowledge of the industry. Most

insightful comments on the study were received at various stages from Frederic Godart, professor

of Organizational Behavior at INSEAD and the author of Unveiling Fashion: Business, Culture,

and Identity in the Most Glamorous Industry, Palgrave Macmillan; Dr Suresh Gupta, Supply Chain

Management professor and consultant; Dr Nobuya Haraguchi, Industrial Development officer at

United Nations Industrial Development Organization (UNIDO); Ms Chantal Dupasquier, Chief,

Policy Reviews Section, United Nations Conference on Trade and Development (UNCTAD), and

Ms Ariel Zborowski, a former financial analyst at the supply chain management department of

GAP.

7

Rationale for the Study

The Rana Plaza tragedy and the subsequent reactions of global brands; Bangladesh’s

manufacturers and their associations, such as the Bangladesh Garment Manufacturer and Exporter

Association (BGMEA) and Bangladesh Knitwear Manufacturers and Exporters Association

(BKMEA); the government of Bangladesh; and the International Labour Organization (ILO); as

well as global media and public opinions led many stakeholders to question whether they ought to

continue doing business in Bangladesh. Others took the tragedy as a wake-up call and sought to

recover the reputational damage to Bangladesh’s garment industry. Few, however, have given

thought to the sustainability of the value chain and the extent to which social and governance-

related issues in the supply chain were discussed—whether they were deeply explored or put to

the scrutiny of vigorous analyses.

Thanks to global expansion of production networks, many developing countries have gained

opportunities to participate in global supply chains, which have opened a promising path of

development. Bangladesh entered in the global production chains of ready-made garments (RMG)

in the late 1970s and according to WTO trade statistics, as of 2014 has grown since to become the

second largest manufacturer after China. The Bangladeshi ready-made garment industry has

become the driver of the country’s economy, engaging over four million workers, mainly females

from impoverished rural areas, contributing 80% of the export and earning over 26 billion US

dollars per annum. As the industry gained its foothold, standards within the work environments

needed attention as proven by the Rana Plaza tragedy in April 2013 which resulted in 1,129 deaths

and more than 2,500 injuries to workers. It is not difficult to find evidence that documents

inadequacies in respect to protecting human and labour rights, working conditions, and fairness in

wages, even despite improvements following the Rana Plaza incident. For all stakeholders, Rana

Plaza was a wake-up call for the need to improve human and labour rights as described in the UN

Guiding Principle on Business and Human Rights.

The questions raised by this study are as follows: Is the global supply chain fair and sustainable

for Bangladesh? What can global brands do as the major stakeholders? What can main suppliers

or manufacturers do in the local supply chains in the country? What is the role of the government?

This study was designed to address these questions. It outlines the entire value chain as well as the

participants involved and identifies their respective contributions in terms of value creation and

appropriation. These theoretical foundations are employed to examine the status of the social and

corporate governance aspects of the garment global supply chain and to assess its sustainability.

The study examines—with greater precision than has been done previously—the main threats to

the existence and future prosperity of the garment supply chain by examining issues such as safety,

labour rights, brand image and sustainability of the Bangladesh garment industry.

Is it possible to raise wages of the workers, to improve safety as well as workplace conditions and

the environment, and to ensure employees enjoy human and labour rights while Bangladesh

maintains the growth of the industry and even enhances its competitiveness in the global market?

To answer this question, this study was initiated to construct the global value chain of ready-made

garments in its entirety—at the worker, employer/manufacturer, wholesaler and retailer levels—

and try to find solutions in its analysis of the chain and to assess capabilities.

8

We extended the analysis to include the level of consumers at the lower end of the chains. They

give the final words on price, which determines the total sales or value created for appropriation.

The total value created and how it is distributed amongst the participants demonstrates the fairness

of the global chains. The consumer price index of urban apparel in the US market has been

constantly falling for the past 20 years (though, at best, remaining flat for the past several years),

while that of all consumer items have risen over 50% during the same period. The trend is

continuing, and the gap in the price index between the two is widening, with apparel became less

than half of the average of all consumer items. We all know that consumers are the big winners as

seen in the consumer surplus generated through falling price. Do consumers make independent

decisions? To what extent are consumers’ preferences and demands created by retailers or brands?

Will the Bangladesh ready-made garment industry be able to move up the value chain and capture

more value? Research consistently shows that firms’ ability to learn and upgrade themselves via

participation in global supply chains rests on their own technological resources and capabilities.

This study attempts to determine if Bangladesh’s industry would be able to move up the value

chain and be sustainable despite studies indicating that a majority of emerging market firms are

unable to benefit from this opportunity due to limited capabilities that constrain their learning

capacity (Marchi, Giuliani and Rabellotti 2016).

The study also assesses whether the global value chain has a built-in market mechanism that moves

towards becoming fair and sustainable in light of the existing economic structures of trade and the

industry or if some intervention is required in the global value chains.

9

Executive Summary

Bangladesh’s garment industry has played a major role in the economic development of the

country through job creation and poverty reduction. In recent years, and particularly after the Rana

Plaza tragedy, concerns have grown over the plight of workers, safety and labour conditions at

their work places, fairness of wage levels and value distribution in global value chains. The Rana

Plaza incident required the Bangladesh RMG industry to seize an opportunity to adjust the current

policies for the sustainability of the industry.

Concerns regarding value distribution among participants in global supply chains have recently

attracted substantial attention and have been subject to heated debate in academia, politics and the

media; however, they have been the subject of only limited vigorous research. In this study, we

seek to address this gap by examining—theoretically and empirically—the relationships between

value creation and value appropriation in global supply chains. The insights gained provide a basis

for recommendations for participants and stakeholders in global supply chains regarding the

construction of just and fair value distribution, thus ensuring the long-term sustainability of supply

chains. The research setting is the global supply chain of garments, and the study focuses on

Bangladesh as the producing country and global apparel companies from the US, Europe and

Japan.

We develop and evaluate empirically a theoretical framework that treats value creation and value

appropriation in a unified manner and establish a means to compare contributions of respective

participants1. Our approach is based on a broad view of value creation and conceptualizes social

value and governance issues as intrinsic aspects of value creation on par with the economic,

production-related dimensions usually considered to constitute value creation.

Analyses of value creation and value appropriation by the participants in the global garment supply

chain, measured respectively by value added and profitability, show some imbalances between

value creation and value appropriation in relation to Bangladesh’s manufacturers, whose value

appropriation appears substantial when assessed in relation to value creation (see the summary

table below).

Value Creation and Value Appropriation, Garment Supply Chain, Average Per Firms

Value Creation

(Value added % sales)

Value Appropriation

(Profit margins)

Lead firms

5 year average

0.85 9.70

Bangladesh’s manufacturers

4 year average

0.085 11.06

Bangladesh’s labour

% change, 1994-2015

Labour productivity:

391%

Wages:

22%

1 Value creation is the value-added contribution made by each participant in the chain towards the creation of the

final output. Value appropriation is the share of the combined value created by the chain that is captured by each

participant. For more elaborated discussion of these concepts and the way they are operationalized, see the theory

section ahead.

10

We extend our theoretical framework to offer some insights regarding value creation and

appropriation by labour employed in garment production. As a factor of production in which costs

are incorporated in the value creation of production units, labour is not usually incorporated in

analyses of this kind on their own. However, garment production is labour intensive, with the

labour force made up of mostly low-skilled labour whose limited negotiating power makes them

vulnerable to possible violations of labour rights and standards, and is likely to distort an adequate

balance of value creation and appropriation. As the summary Table above shows, the contribution

of Bangladeshi labour to value creation, measured by a growth of labour productivity, is not

matched by a raise in wages. This distortion should be seen in light of the fact that, during the

study period, there had been minimal capital investment in productivity-enhancing processes, and

the rise in labour productivity is attributed mostly to improvement in labour skills and efficiency.

This distortion suggests a significant market failure and calls for government intervention as

market forces alone do not offer sufficient incentives for the manufacturers to correct for it.

Regulatory intervention on all manufacturers is needed to ensure change is sustained, lest there is

an incentive to avoid compliance in order to gain cost advantage. However, to date, Bangladesh’s

government has not displayed the ability to correct for the distortion we document in labour

conditions or correct for the market failure that has enabled it. We propose several alternative

constituencies that should assume the responsibility for instilling change, namely international

organizations—notably the ILO, global brands, social activists and NGOs.

As an international organization with the global mandate for improving labour conditions around

the world, the ILO possesses substantial legitimacy and credibility in demanding change and acts

itself to bring it about. Absent the political and legal power to enforce change, the ILO should use

its soft power and credibility to act as an agent of change, both directly by putting more pressure

on Bangladesh government and indirectly by activating other national governments to act towards

this goal. For example, the ILO succeeded in improving labour conditions in Swaziland by having

the US government remove Swaziland’s preferential access to the US until labour conditions

improved. Six months after this intervention, there was considerable noticeable improvement. This

suggestion reflects the spirit of the ILO’s revised tripartite declaration of principles concerning

multinational enterprises and social policy (MNE Declaration), which will come into effect in

November 2017 in commemoration of the 40th anniversary of the original declaration. A major

theme of this revision is the role that national governments should assume in improving labour

conditions in the host countries in which their firms operate.

The ILO should play a role also in improving data collection, correcting for the information

asymmetries that proliferate throughout the local garment industry. The ILO should strengthen its

own efforts to collect data and put pressure on Bangladesh’s government to do so as well. More

broadly, the ILO must take a leading role in advocating the need for greater transparency and the

imperative of placing transparency requirements at the centre of the activities of national bodies

overseeing the garment industry.

Global brands possess the ability to impose change by creating market forces that will incentivize

Bangladeshi manufacturers to improve labour conditions, thus correcting for the market failures

that enable the distortion we found in relation to labour in its garment industry. Global brands

11

should create a market for social compliance and human rights by placing these issues as a central

criterion in selecting manufacturers and rewarding manufacturers that adhere to high standards by

giving them work. Anecdotal observations suggest that some brands are already implementing this

practice, but so far, this has been the exception rather than the standard. Surveys repeatedly show

that the dominant selection criteria are costs and speed, and the sustainability of the supply chain

receives only marginal weight (Pious and Burns 2015; Lopez-Acevedo and Robertson 2016).

The Better Work programme and others have demonstrated the power of global brands to improve

working conditions. Studies of garment factories show that the presence of global brands have a

strong impact on governance and local labour conditions. For instance, in comparison to three

2012/13 fatal incidences in garment factories in Bangladesh with a combined toll of 1,252 deaths,

Cambodia—where foreign companies are involved through ownership shares in garment

factories—registered a single fatal incident with a death toll of two people (Stephenson 2013).

Other studies show that being connected to global networks, via either trade or outsourcing

linkages as is the case in Bangladesh, improves labour conditions. Labour employed in factories

that produce for major brands were found to have better working conditions than those elsewhere

(Berik and Rodgers 2010). Such evidence demonstrates the power that global brands have on local

conditions and call for greater involvement by brands operating in Bangladesh towards this end.

Improvements in labour conditions serve the interest of the brands by enhancing their global

reputation and are fundamental for the sustainability of their global supply chains.

Studies also show the impact that a foreign presence can exercise on labour unionization, pointing

to an important direction global brands should seek to make an impact. A total of 300,000

employees serve the largely foreign-owned Cambodian garment factories, a dwarf in comparison

to more than four million employees in Bangladesh. Nonetheless, less than 5% of Bangladeshi

labour is unionized whereas unionization rates in Cambodia garment industry are among the

highest of any major garment-producing country in the world (Stephenson 2013). Cambodian

unions give labour power to collectively exercise their voice on a range of issues ranging from

failure to raise wages to labour safety. Indeed, average wages in Cambodia garment industry rose

by 65% between 2001 and 2011, making garment employees among the highest paid employees

in Cambodia’s manufacturing industries, although this pay level is still among the lowest in the

Asia Pacific region (Stephenson 2013; Yee 2015).

Bangladesh’s garment workers, in contrast, have found it challenging to organize and bargain

collectively. Notwithstanding the commitments made by the Bangladesh government to labour

unionization—including the ratification of ILO Conventions on freedom of association and

collective bargaining and their incorporation in the Bangladesh Labour Law Act—attempts to form

labour unions in Bangladeshi garment factories are being blocked by a myriad of obstacles erected

by the government and the factory managers (European Commission 2015; Human Right Watch

2016). In parallel, the BGMEA, the industry association that represents factory owners, enjoys

considerable political clout, with its members holding about 10% of the Bangladesh Parliament’s

350 seats and having strong ties with government ministers and other officials. This serves to

increase the power imbalance between management and labour and appears to shield owners from

much scrutiny, enabling them to keep wage levels among the lowest in the world as well as

sustaining lax safety standards in their factories (The Daily Star 2009; Chalmers 2013).

12

Global apparel brands should support efforts to ease constraints on unions and prevent factory

union-busting activities. They should take a vigorous position regarding the enforcement of labour

unionization rights and ensure the adherence by all involved to international laws and standards.

Properly functioning labour unions offer a means to correct for the unfair treatment of labour in

garment factories and correct the dissonance between labour productivity and wages that we

document, as well as other dimensions of the working environment. Global brands may also

support the training of labour for effective collective bargaining processes to prevent misuse of

union power and conflicts with the factory owners.

Acting together, global brands are very powerful in relation to the other constituencies involved

with Bangladesh’s garment industry and should assume the lead in instilling change. Global brands

have a moral and ethical responsibility to exercise their collective power to that effect and to

improve labour conditions and the broader governance of the factories with whom they have

commercial relationships. Such actions offer opportunities for global brands to contribute towards

the achievement of the broader societal goals summarized in the Sustainable Development Goals

(SDG) and to demonstrate commitment to the United Nations Guiding Principles (UNGP). In

addition to their moral obligations, global brands are dependent on the long-term sustainability of

their supply chains, making their involvement with governance and social issues in their own

interest as well. The recent declaration of boycott by leading brands in support of garment workers

who have been sacked, hunted or jailed for participating in wage strikes of Bangladesh’s 2017

apparel summit offers a good example of the means the global brands have to enforce change.

The purchasing practices of lead firms should facilitate wage growth through negotiations between

employers and workers to ensure adequate living wage. Many lead firm’s CSR statements express

such commitments and acknowledge responsibility, but less progress is seen in implementing

them. Progress here could be made by following ACT implementation guidelines

https://actonlivingwages.com/memorandum-of-understanding/.

There is also a role for social activists and NGOs. These constituencies have focused their attention

almost exclusively on global brands, resulting in worthy efforts which have led to some

improvements. However, social activists and NGOs ought to target the Bangladesh government as

well, even though this task will likely require the development of tactics that differ from those

exercised on global brands.

Improving labour conditions and creating positive dialogue between employers and labour would

serve the interests of all involved. Estimates by EcoTextile, a magazine of the global textile supply

chain, suggest that in 2016 labour unrest in Bangladesh cost the industry US$100 million in lost

orders and associated disruption costs (see also Shaheen, Raihan and Islam 2013). Others put a

much higher value on the estimated losses. The Bangladesh Garment Manufacturers and Exporters

Association (BGMEA) posits that in 2013 strikes and unrest may have cost the country $3 billion

worth of potential new business. The prevention of such losses, which are borne by all the

participants in the supply chain, should offer incentives for remedy.

Collective action by all involved should be undertaken to pass on the costs of improvement in

labour conditions to the consumers. Our findings show that consumers are major beneficiaries of

the surplus value created by the chain, enjoying apparel prices that continuously go down, creating

13

a growing gap with the general consumer price index over time. They are thus the natural

candidates to bear the cost of improving labour conditions and wages in Bangladesh’s garment

factories. The government should increase minimum wage levels in return for higher pay by global

brands, using its bargaining power relative to the global brands to impose this act. As noted earlier,

the low costs of labour combined with the size of the local industry affords Bangladesh’s

government considerable clout in dealing with global brands. No other country offers similar

benefits, making any exit by the global brands costly and unlikely. Bangladesh’s government

should use this clout as a strategic tool to increase the value appropriated by the Bangladesh

garment industry. For this to succeed, however, regulatory intervention will be needed to enforce

equal pay levels across the industry and to prevent individual manufacturers from competing on

costs. To absorb the additional costs, the brands would raise the prices to the consumers, using

their ethical conduct in their supply chains to justify this move.

We also extend a call for ethical consumption by consumers: to reward in their consumption

behaviour brands that follow high governance standards in their supply chains and to express a

willingness to pay a premium for such behaviour. Brands should publicise their governance

practices and be transparent in relation to their activities in this sphere. National and international

governments, as well as NGOs and social activists, have a role to play in encouraging consumers’

awareness of the merits of ethical consumption.

Given limitations of the data and the analyses we were able to conduct based on the data at hand,

we offer these conclusions as only suggestive, but we believe they are indicative of overall trends.

Furthermore, the magnitude of the differences we find entails a large margin for error, which

fosters confidence in the findings. Another caveat of our work that ought to be borne in mind when

interpreting our findings is that we have taken a snapshot at a given point in time of the

relationships between value creation and appropriation, and we did not account for the long-term

nature of these relationships. Notable among these long-term considerations are environmental,

social and global issues (ESGs) that are not explicitly accounted for in our study. However, we

recognize and support the study of these issues within the framework of value creation and value

appropriation as important topics for future research.

Comparisons of value appropriation across several supply chains in other industries show a more

balanced distribution of value in the garment chain than in other global chains in which lead firms

appropriate much more value than the other participants. We suggest three explanations for this

distinctiveness of the garment chain. The first is related to the competitive intensity in the market

for the final goods, which puts pressure on prices, making the consumers, rather than the lead

firms, major claimants of value generated by the supply chain and eroding lead firms’ revenues.

The second explanation refers to the central place of social and governance issues in value creation

of garments, in which costs are borne in large part by the lead firms and increase their costs2. Both

forces reduce lead firms’ profits. In parallel, government support for Bangladesh’s garment

manufacturers, part of a policy of export-led economic development, has considerably reduced the

2 There are considerable variations among global brands in terms of their commitments to ethical conducts in their

supply chains and their investment in improving work conditions. The absence of data on such investments does not

enable a systematic view, but anecdotal observations suggest that only a small fraction of global brands adhere to the

ILO standards or to any other standards of management of supply chains. It might be that broader change in this regard

could only be achieved by regulatory intervention by governments.

14

costs of doing business for Bangladeshi manufacturers and improved their performance, further

eroding the differences between them and the lead firms.

Beyond explaining our findings, we question the continuation of this policy approach at this stage

of the development of Bangladesh’s garment industry. Since the emergence of the garment

industry in the 1980s, Bangladesh’s main comparative advantage has been its low cost, enabled by

low labour cost and government support that had reduced the cost of doing business for

Bangladeshi manufacturers. This cost advantage turned Bangladesh into a primary-sourcing

destination for companies that compete on price and specialize in low- and mid-market priced

apparel that, by their very nature, are highly price sensitive, and created constant pressure on

manufacturers’ prices. Government policy has played a major role in supporting this outcome. The

gist of its policy—essentially since the emergence of the industry—has been to lower the cost of

doing business for the manufacturers, making them more cost competitive. This policy has been

instrumental in encouraging the emergence and development of the industry but may no longer be

appropriate at the current stage of the industry.

We suggest that, at this stage of its development, the industry will benefit from a change in the

policy approach from cost benefits to skills upgrade. Continuing government support in the form

of past policies may even arrest a natural upgrade process and harm the future development of the

industry. A large body of academic research supports the notion that state-guided policies can be

helpful to mobilize resources at the early stages of development but can then become a serious

drag on productivity and innovation, which are the very factors needed for the transition to middle

income economies. Policy actions should be directed instead to providing the resources required

to assist garment manufacturers in upgrading their skills. This in turn will increase their ability to

differentiate themselves and increase their ability to appropriate greater value from their

participation in the supply chain. As have been observed and described in several cases, some

Bangladeshi garment manufacturers have already been investing in human resources, improving

workplaces, and raising human resources competencies and manufacturer’s competitiveness and

productivity, speaking for the benefits of such initiatives for all involved.

We outline the boundaries, conditions of our findings, and conclusions across supply chains and

discuss the industrial characteristics that may limit generalization, notably the factor of intensity

in garment production and the diminishing role of labour over time (ILO and Asia Development

Bank 2014), as well as differences in skill levels and specializations of participants across supply

chains. We also examine the validity of the findings over time and draw attention to the fact that

our study was conducted in the aftermath of the Rana Plaza incident, a challenging interval that

had direct impact on the issues we studied.

15

Chapter 1 Introduction

Concerns regarding value distribution among participants in global supply chains have recently

attracted substantial attention and have been subject to heated debate in academia, politics and the

media (Dedrick, Kraemer and Linden 2009, 2011; Koopman, Powers, Wang and Wei 2010; Powell

2014). The argument has often been encapsulated in a breakdown of the retail price of a piece of

output, using it to illustrate the uneven shares that respective participants in the supply chain

command. For instance, The Fair Wear Foundation (2012) presents a breakdown of a €29 T-shirt

to suggest that the three major players involved in this chain—the manufacturers, the wholesalers

and the retailers—get respectively 17%, 24% and 59% of the retail price. D’Arcy, Norman and

Shan (2012) demonstrate a similar distribution based on Australian input-output table data. See

Moazzem and Basak (2015) for a review and discussion of other studies of the garment supply

chain that have reached similar conclusions. Such uneven distribution of value in global supply

chains has been noted also in relation to sport shoes (Gerard 2011; Kish 2014), mobile phones

(Dedrick et al. 2009, 2011), and telecommunication (Li and Whalley 2002), to name a few.

These findings are used to claim that the low-skilled labour employed in global supply chains does

not appropriate fair shares of the combined value it helps create and is being exploited by the large

multinational companies who use their global market power to maximize their shares (Anner, Bair

and Blasi 2012; Clean Cloth Campaign 2015). Put differently, these critics suggest that value

creation and value appropriation are misaligned, corresponding respectively to cells 1 and 3 in

Figure 1, and hence are morally distorted and economically unsustainable.

Figure 1. Value Creation and Value Appropriation in Supply Chains

Val

ue

Appro

pri

atio

n

Hig

h

1

[Global firms]

2

Low

4 3

[Unskilled labour]

Low High

Value Creation

This study is designed to address this issue. Combining positive and normative approaches, we

begin with the premise that global supply chains can only succeed in the long run if value is

appropriated in an equitable manner among the participants, that is, when value creation and value

appropriation are aligned, in correspondence with cells 2 and 4 in Figure 1. Building on these

foundations, we have developed and analysed a framework for evaluating value creation and value

appropriation and employ it as a means of evaluating value appropriation in relation to value

creation.

16

Presenting value creation and value appropriation in a unified framework enables us to study the

relationships between them, and at the same time, to observe their different dynamics and the

variety of firm capabilities and policy responses needed for each of them to materialize. The merit

of this approach lies in that the two are intrinsically related. Value must be created for it to be

appropriated, but anticipated value appropriation affects the participants’ incentives to create

value, and might be the major determinant of their contribution to the joint effort that leads to value

creation by the entire chain (Adegbesan and Higgins 2011). Therefore, value creation—the overall

size of the pie—cannot be treated in separation from how it will be divided among the participants.

We examine this framework with reference to the global supply chain of ready-made garments,

focusing on Bangladesh as the producing country and the global apparel companies that operate

in Bangladesh, paying specific attention to the US and EU, the two major destination markets of

Bangladeshi garment export. We articulate in detail the breakdown of the activities that take place

in the process of transforming cotton, yarn and wool into apparel goods and selling them on the

market, and estimate the value added by various participants. We contrast these estimates with the

respective value appropriated by them, as reflected in their profit levels.

We embrace a broad view of value creation to encompass both economic activities and social and

governance ones, and view the latter as an intrinsic part of value creation. We further suggest that

governance failures represent a major threat for the creation of economic value in supply chains,

and should, therefore, occupy a central part in value creation. We examine the value creation

activities undertaken by the participants in alignment with social values, such as international

labour standards, safety of work environment, and protection of labour, as well as the appropriation

of adequate shares of the value created.

Our findings, which are based on a study of two major participants in the global garment supply

chain, namely Bangladeshi manufacturers and global apparel companies, do not lend support to

the claims that value appropriation in the garment supply chain is distorted and unfair, and suggest

instead that the relationships between value creation and value appropriation are more balanced

than they are often portrayed. Our analyses show that, after taking account of the value added by

the participants in the chain and their costs, including indirect costs as well as costs originating in

social and governance activities, value creation is broadly in line with value appropriation. Given

the limitations of the data available and the constraints that this imposes on the method of analyses,

we offer these conclusions as suggestive and indicative, rather than as firm evidence. Nonetheless

we believe that they convey an order of magnitude and overall trend. However, given the

magnitude of the differences, there is large margin for error for the overall conclusions to continue

to hold.

We extend our theoretical framework beyond the two participants—manufacturers and lead

firms—to examine labour creation and appropriation in relation to labour employed in garment

production. This addition enables us to contrast and compare these relationships in the global

versus local parts of the production chain. The balance between value creation and appropriation

in relation to labour is less than clear a priori, with indications of market failures of various types

originating in information asymmetries and market power, which may challenge value

appropriation by labour. We analyse pay levels to labour in Bangladesh’s garment industry, which

we take as an indication of value appropriation by labour, and examine it with reference to labour

17

productivity that is treated as a broad indication of labour’s contribution to value creation. We find

evidence for imbalance between the two, suggesting that labour productivity has increased much

faster than pay levels, with the gap particularly evident in more recent years. These findings should

be considered in light of the fact that most of the rise in labour productivity is a result of

improvement in labour skills and efficiency, as there have been minimal, if any, capital investment

in productivity improvement during the period studied. We present these findings as only

suggestive, given the limitation of the data, but suggest that they call for policy intervention to

secure value appropriation on the part of labour that is aligned with value creation. Specific policy

actions that should be taken towards this end include increased minimum wage, particularly to

unskilled labour, as well as the formation of labour unions to increase labour’s negotiating power

and reducing some of the information asymmetries between them and the other participants in the

supply chain.

With the limitations of the analyses in mind, this finding suggests that value appropriation is

determined by value creation and the two cannot be discussed in isolation. To further substantiate

this suggestion, we conduct a series of case studies of selected firms that appear to appropriate

more value from their participation in the garment supply chain than others. These case studies

demonstrate that this ability rests on them creating more value in the first place. A manufacturers’

ability to meet the needs of their customers better than other firms and create more value for them

determines the amount of value they appropriate. These firms employ a variety of means to

enhance value creation and do so in a firm-specific manner that creates a source of differentiation

and competitive advantage. This variation is particularly interesting among Bangladesh garment

manufacturers who have access to similar resources and opportunities, and operate under similar

economic, institutional and competitive conditions, pointing to firm-specific capabilities as a major

determinant of the ability to create and, hence, appropriate value. These findings speak to the

importance of differentiation and specialization in determining value appropriation in supply

chains.

Comparing the garment industry with several other global supply chains demonstrates a more

balanced distribution of value in the garment industry among various participants than that

observed elsewhere. Specifically, we do not find the pattern documented in relation to other supply

chains whereby the lead firms and/or the retailers appropriate much larger shares of the value

created, in some cases larger than that of all other participants combined, as measured by respective

profitability.

We attribute the distinctiveness of the garment supply chain in this regard to several features of

the industry related to the competitive intensity in the market for the final goods and the high value

assigned to social and governance issues as intrinsic to value creation. Competitive pressure has

pushed prices down and turned consumers—rather than lead firms—into major claimants of the

value created by the supply chain. Under these circumstances, most of the cost saving by lead firms

appear to be passed on to consumers. The large investment in governance of the supply chain and

the creation of social value through means such as investment in building safety and compensation

to the victims of Rana Plaza, which has been embraced by lead firms, further reduces their profits.

The pressure of both forces on the profitability of lead firms has grown dramatically in recent

years. The advent of the internet and social media has equipped consumers with collective and

independent power, which is not influenced by publicity from lead firms, to press sellers for price

18

reductions, and the aftermath of the Rana Plaza collapse has increased the pressure on lead firms

to attend to social and governance issues in their supply chains.

In parallel to these, support by Bangladesh’s government has substantially improved the

performance of the manufacturers. Since the inception of the industry in the late 1970s,

Bangladesh’s government offered generous support for garment manufacturers as part of its

export-led development policy. These include cash incentive for export, duty exemption of

imported intermediaries, bonded warehouse facility, and low corporate tax rates compared to those

imposed on other industries3. Although the intensity of the support has been reduced overtime, it

has played a major role in eroding the performance differential between the manufacturers and the

lead firms.

The imbalance we observe between value creation and appropriation might be attributed in part to

the scarcity of firm-level data about Bangladeshi manufacturers. Despite differences in ownership

and legal requirements in the respective countries, the activities of the brands in Bangladesh and

elsewhere are documented in detail and publicly available. Bangladesh’s manufacturers, in

contrast, are incorporated as Limited Companies and are privately owned by their founders or their

families, and are subject to minimal requirements to share information about their activities. These

gaps in transparency, coupled with different ethical norms regarding labour rights and value

distribution of local stakeholders, expose the brands to strong societal pressure to conduct their

business while adhering to high moral standards, even when it is inconsistent with financial

considerations.

Failure to meet these expectations is punished heavily by stakeholders, creating huge reputational

risk and acting as effective market mechanisms to correct for any deviations from societal

expectations to create value in a fair and sustained manner. No equivalent mechanisms exist in

relation to the manufacturers. Lack of transparency shields the manufacturers from accountability

and challenges the ability to observe market distortions and correct for them. It also challenges the

ability to study it and uncover the actual details of their activities, which calls for greater tolerance

for the limitations of our data.

These findings carry important implications to practice and scholarship. We outline the role of

policymakers in enhancing national firms’ ability to create value by differentiating their countries

as production locations and removing obstacles for national firms to create value. We also spell

out major ways in which garment producers can enhance their ability to create value by meeting

closely the demand of lead firms. For the lead firms who command value creation through the

entirety of the supply chain, the study stresses the creation of synergies across the supply chain to

enhance overall value creation, and the development of skills and capabilities required to create

value through collaboration rather than on their own.

The study also offers ground for drawing recommendations for various participants to construct

sustainable global value chains that are based on principles of social justice and proper governance

where value creation and value appropriation are balanced. We suggest that, for all involved,

3 It ought to be noted that tax benefits for garment exporters are not uncommon. In many countries, exporters are

located in Export Processing Zones (EPZs) and enjoy considerable benefits, including full tax exemption.

19

deviations from this balance represent ignorance of long-term strategic and sustainability

considerations. For the lead firms who construct and manage the chain, failure to address fair value

appropriation and exclusion of the social dimension of value creation represents an adverse

situation that will jeopardize their relationships with society and damage societal trust in them.

Such a situation is undesirable for other participants as well because it is based on a misevaluation

of their capabilities and inefficient utilization of their resources.

The study also contributes to academic interest in value creation and appropriation in supply chains

(Brandenburger and Stuart 1996; Chatain 2010). Studies that examine value creation and value

appropriation in a unified framework do not do so with reference to supply chains, undermining

the ability to understand value distribution in this distinctive setting (Bowmen and Ambrosini

2000; Jacobides, Knudsen and Augier 2006; Molloy and Barney 2015). Others focus on external

factors, notably the nature of the competition and market failures, as they affect value creation and

appropriation (MacDonald and Ryall 2004; Chatain and Zemsky 2011), or else seek to explain

variations in value appropriation across supply chains and participants in them (Li and Whalley

2002; Jacobides, Knudsen and Augier 2006; Dedrick et al. 2009, 2011). That research pays less

attention to the relationships between value creation and appropriation that are our major interest.

We also contribute to scholarly interest in identifying the claimants of value beyond the firms who

generate it (Coff 1999; Molley and Barney 2015). Extant research in this area identifies employees,

shareholders and top management as major stakeholders that appropriate stakes of the value

created by firms, and attributes this outcome to the knowledge they hold that affords them strong

negotiating power vis-à-vis the firm. We contribute to this stream of research by identifying

consumers as additional claimants of value (in terms of the lower price) and by outlining the

mechanisms that give consumers negotiating power in their dealing with sellers of apparel

products.

Furthermore, by studying in a combined framework all the stakeholders involved with the supply

chain—including labour, government and consumers—we identify contributors to value creation

and appropriation that may have been overlooked by previous research in this area. This also

enables us to document imbalances in supply chains beyond those among various producers. The

inclusion of governments as an additional relevant stakeholder enables us to suggest that

governments wield an additional influence on value creation and appropriation in global supply

chains.

Corporate Governance and the Focus of the Study

Traditional public governance mechanisms are rooted in national laws and regulations formulated

by the ILO. We are conscious of the growing concern and compliance beyond laws but related to

human rights and labour in the international community, in particular relating to corporate social

responsibility (CSR), business and human rights, and sustainability-related issues of transnational

corporations (TNCs).

However, in this study the focus is mainly on the corporate governance of lead firms as they are

the primary leader and manager of the global supply chains manufacturers. Due to this role, lead

firms have responsibilities, and their “good” governance plays a pivotal role in many aspects of

20

the global value chains, in particular, sustainability. Without their good leadership and corporate

governance, the Bangladesh garment industry will not be able to sustain itself. However, this study

does not explore multilateral initiatives such as the UN Guiding Principles on Business and Human

Rights (UNGP), the Guidelines for Multinational Enterprises of the Organization for Economic

Co-operation and Development (OECD), the ILO Multinational Enterprises (MNE) Declaration,

the UN Global Compact, and several EU initiatives through directives or other policy-making

mechanisms due mainly to the abundance of literature on the subject.

Nor does it explore public governance as the state’s duty to promote compliance and enforce

national labour laws and regulations, and to ratify and implement international labour standards,

such as those defined by the ILO. Primarily the focus of this study is on private governance led

by enterprises, employers’ organizations or industry associations. Corporate social responsibility

(CSR) and private compliance initiatives (PCIs) are considered as part of the governance and

management of the lead firms and manufacturers.

A novelty of the study lies in the perspectives of the lead firms and evidence-based investigation

into the fairness of value capture/appropriation and eventually value distribution amongst the

major stakeholders—lead firms, manufacturers and labour—and in the explicit global dimension

the study brings to the analysis, which we treat as a fundamental part of both value creation and

value appropriation. This enables us to examine how differences in the global scope and reach of

participants in supply chains affect their ability to create and appropriate value. It also serves to

account for the complex managerial task associated with the circulation of products and

information along global supply chains, and incorporate it as a critical value-creation activity. The

recommendations include those for sustainability and survival of the industry as well as

governance of the lead firms, manufacturers and the government towards sustainable industry.

Yet another notable contribution of this study lies in the examination of value creation and value

appropriation in the garment supply chain, which to the best of our knowledge is the first study to

do so. As our findings and conclusions demonstrate, the focus on garments—an industry with

distinctive sources of value creation and varying participants—enables us to uncover aspects of

value creation and value appropriation, and the combination of the two on a global scale, which

have gone unnoticed by extant research on other industries.

Study Contribution to the Implementation of the SDG and CSR in Global Supply Chains

The issues we address in this study are at the centre of broader societal commitments to the

improvement of the state of the world, expressed formally in several mandates. Notable among

them are the UN Guiding Principles on Business and Human Rights (UNGP), a set of guidelines

for states and companies to prevent, address, and remedy human rights abuses committed in

business operations (also known as the Ruggie Principles, after John Ruggie, the UN Special

Representative on business and human rights who proposed them), as well as the UN Sustainable

Development Goals (SDGs). Adopted by member states in 2015, the SDGs build on the

Millennium Development Goals to ‘transform our world for the better by 2030’, with 17 specific

goals and 169 associated targets to end poverty, protect the planet, and ensure prosperity for all as

part of a new sustainable development agenda.

21

Global supply chains are central to the achievements of these goals due to their vast magnitude

and impact on production and consumption patterns around the world. By deepening the

understanding of the dynamics of global supply chains and the relationships between value

creation and appropriation among the various participants in global supply chains, our study makes

several notable contributions towards the achievement of the goals stated in the UNGP and the

SDG.

A novelty of our study lies in the broad range of stakeholders we examine, an approach that

parallels the assumption that underlies the UN initiatives: multi-stakeholder engagement is

necessary to achieve the implementation of the principles. These initiatives describe a shared

responsibility between states and corporations with respect to the achievement of sustainability

and positive human rights standards as a norm in business. We further expand this scope of

stakeholders to include labour and consumers as additional stakeholders; they are not usually

included in analyses of this kind.

The findings and the recommendations we advance have direct implications for several of the goals

stated by the UN initiatives—at the level of the garment industry in Bangladesh, the Bangladeshi

economy, and globally. Our call to raise labour wages and improve labour conditions in

Bangladesh’s garment factories contributes towards progress in achieving the goals to end poverty,

ensure healthy living conditions and promote well-being for all. The large number of women in

the garment labour force in Bangladesh and elsewhere imply that the major beneficiaries of these

recommendations are women, serving to advance the SDG goal of achieving gender equality and

empowering women.

At the level of the economy as a whole, our study contributes to the achievement of sustainable

economic growth by demonstrating a path for enhancing the sustainability of the supply chain and

its long-term survival. Given the importance of the garment industry for Bangladesh’s economy,

it plays a central role in bringing about these outcomes. The match between productivity and

wages—the indicators we use to measure value creation and appropriation—is recognized as a

condition for economic development and growth. A recent ILO and Asian Development Bank

report (ILO and Asian Development Bank 2014) has extended a call for governments to strengthen

their wage-setting institutions in order to reach this goal. In support of such calls, studies of

garment factories in Sri-Lanka and Cambodia show that improvements in working conditions

translate into productivity growth (Stephenson 2013; Jayasinghe 2016). Even though improving

working conditions and raising wages increases the overall costs of production, it more than pays

off through improvements in labour morale, which translates into greater efficiency and

productivity. Our anecdotal observations of the garment industry in Bangladesh similarly suggest

that successful manufacturers in Bangladesh who treat their workers better gain considerable

economic benefits.

Beyond Bangladesh, global supply chains and their associated actions are major contributors to

environmental concerns. Global clothing production doubled between 2000 and 2014, and with it

increased environmental costs. From just a few collections a year, fast-fashion brands now offer

dozens, with Zara leading with 20 a year, followed by H&M with 16 (The Economist 2017).

According to McKinsey estimates, producing 1 kilogram of fabrics generates on average 23

kilograms of greenhouse gases. Because consumers keep most types of apparel only half as long

22

as they did 15 years ago, these inputs quickly go to waste. Environmental costs are expected to

grow dramatically as emerging market consumers develop more Western apparel shopping

patterns. Recognizing the fact that this model of clothing production is not sustainable, a few

leading global apparel brands such as H&M and Nike have taken actions to make their production

more environmentally friendly, for instance, by using renewable energy, cutting water and

chemical use, and developing manufacturing processes that reduce inputs. They also encourage

brands to recycle old clothes by returning them to the stores; however, shipping these clothing to

poor countries generates its own environmental costs and destroys local garment industries (The

Economist 2017).

By offering insights regarding their operations, including means to improve efficiency of resource

utilization, our study bears some relevance also towards the SDG goals of environmental

sustainability and sustainable production and consumption patterns. On the production side, the

extensive flow of raw material and intermediaries that is generated by global supply chains creates

enormous amounts of trade. The United Nations Conference on Trade and Development

(UNCTAD) estimates that such intra-firm trade accounts for about 80% of total global trade

(UNCTAD 2013). These flows increase energy consumption for transportation with the resulting

air pollution and the exploitation of scarce energy resources. The management of global supply

chains and the growing reliance on technology to increase efficiency and shorten delivery time

generate considerable e-waste from electronic equipment. On the consumption side, lower costs

and rapid fashion changes, in large part enabled by global supply chains, have considerably

increased both consumption and the amount of consumption waste. Such is the magnitude of these

environmental influences that some have claimed the clothing industry to be the world’s second

most polluting business, after oil (Leitch 2017).

Concerns about the environmental impact of clothing have been increasing throughout the fashion

industry, leading to the design of so called low environmental-impact clothing, with designers

marketing ethics on par with aesthetics and large global brands making efforts to reduce the

environmental impact of their business and produce environmentally responsible collections. This

has triggered advocates for modest buying and calls for ‘buy better and buy less’. The issue with

these attempts is that low-cost, high-volume fashion is inherently wasteful. As a fashion journalist

put it recently: ‘Green fashion is a contradiction in terms. Fashion is, after all, about consuming

unnecessary things. … to be really green you have to adopt the ‘buy better and buy less’ mantra’

(Leitch 2017, p. 62).

The Global Garment Supply Chain

Different terms are used around the world to describe the fabric people wear. Garment is

commonly used in countries such as the UK. In the US, it is referred to as apparel or ready-made

garment (RMG). In Germany, it is called clothing. The different names are internationally

recognized and are often used interchangeably, as we also do in this study. These names represent

garment production in bulk, in which the consumer has no say on the design and patterns, as

distinguished from bespoke garments that are tailored and based on individual choice.

Several features of the garment industry make it particularly interesting for the study of value

creation and value appropriation in global supply chains. It is one of the most global value chains

23

in the world. According to WTO trade statistics, in 2015, global apparel trade accounted for more

than 11% of the annual growth in world export value, the highest share by any single industry.

This activity is taking place in a globally-spread production network that brings together a highly

diverse set of players that originate in countries at different levels of economic development and

have varying sources of power and means of value creation (Gereffi 1999; Fernandez-Stark,

Frederick and Gereffi 2011; Maximilian 2013; Hoque 2013; Elm and Low 2013). The stark

differences among the participants—greater than in most other global supply chains (e.g.,

electronics, cars)—pose a challenge for the negotiations that govern value creation and

appropriation, and make the study of these issues in the context of the garment industry of

considerable merit.

In addition to and perhaps related to the large variations among the participating countries as noted

above, value creation in the garment industry combines economic activities with social and

governance ones more than in most other global supply chains. This provides an appropriate setting

for the examination of the relationships between these dimensions and their combined impact on

the relationships between value creation and value appropriation.

Yet another feature that makes the garment supply chain interesting for our study is its complexity.

It connects multiple countries in a complex structure of sourcing interactions and tight

interdependencies, interacting with each other through complex sets of trade regulations and

agreements. The multiple participants are also guided by different local regulations, employment

and environmental protections, including wide-ranging perceptions of social responsibility and

moral accountability (Laudel 2010). Such complexity introduces a large scope for gaps between

value creation and appropriation, making the study of these issues in this context of particular

importance.

Lastly, the garment industry is interesting because it represents a major potential source of growth

for emerging economies, making value appropriation from participation in the supply chain vital

for economic development. This industry has been instrumental in drawing emerging countries

into global supply chains and has acted as a major catalyst for their economic development and

industrialization (Fernandez-Stark et al. 2011; Maximilian 2013). In many of the major garment

producing countries, garment accounts for the largest shares of exports and is a significant

component of GDP and employment. Understanding the dynamics of value creation and

appropriation in this industry is thus fundamental for reassuring its continuous contribution to

economic development and increasing efficiency where possible.

The History of Bangladesh’s Ready-Made Garment Industry and its Current Status

The focus of this study is on Bangladesh’s garment manufacturers and global brands and retailers

from the US, EU and Japan. According to WTO trade statistics, as of 2014 (latest available at the

time of writing), Bangladesh is second only to China as the world’s largest exporter of ready-made

garments (RMG), accounting for 5% of world RMG export. In 2016, about 200 retailers and brands

from more than 20 countries around the world outsourced their garment production to Bangladesh,

among them the world’s largest such firms, including H&M, Walmart, Tesco, Uniqlo, C&A,

Mango, Carrefour, Kmart, and Li & Fung and Primark.

24

Bangladesh’s RMG industry has travelled a long way in the last three decades since starting the

journey in the late 1970s. Starting with only a few million dollars of export earnings, it is now an

industry of more than 25 billion dollars. However, this journey was not always smooth. The sector

had to face a range of national and international challenges, even as it has received changing

support from the government. At this point of the journey, the RMG sector of Bangladesh has

become strong, confident, polished, compliant, technologically advanced and ready for a big jump

ahead.

The RMG sector in Bangladesh emerged as a small non-traditional sector of export in late 1970s.

In 1978, 130 people, of which 18 were female, were sent to see Daewoo's state-of-the-art

technology in Pusan, South Korea, and acquire the technical and marketing know-how for garment

manufacturing and exporting. This initiated the new era of manufacturing industries in

Bangladesh. The RMG sector grew fast with young energetic workers, very good support from the

government (in terms of bonded warehouse facilities, cash subsidy for export, etc.) and financial

institutions (such as revolving letters of credit). Moreover, quotas under the Multi-Fibre

Arrangement (MFA) worked as a blessing in disguise for Bangladesh’s RMG, allowing entry into

large markets (Ahmed 2009).

Even though it started as a small initiative, over time the RMG sector of Bangladesh has carved

its niche in the world market and sourced a big share of the export pie. Garments made the first

shipment of garment products worth only $69 to the US in 1978. Within two decades, RMG

exports from the country jumped to $4.5 billion in FY2002. Over the last decade, the sector

registered a phenomenal growth rate of 15% per annum, which is impressive by any standard.

Now, the RMG industry is the only multi-billion-dollar manufacturing and export industry in

Bangladesh.

In fact, this was an exceptionally high growth rate for an emerging industry anywhere in the world.

The industrial base, which sustained such high growth, also enjoyed a robust expansion, from less

than 50 factories in the 1980s to more than 3,400 in 2002, with 4,000 factories currently operating

in the industry, employing more than four million workers. More than two-thirds of the workers

in the industry are female. Bangladesh is clearly ahead of other Southeast Asian suppliers in terms

of capacity in the RMG industry. It also offers satisfactory levels of quality, especially in value

and entry-level midmarket products (Ahmed and Peerlings 2009; Ahmed 2015). This growth is

documented in Tables 1 and 2 in terms of exports and employment.

25

Table 1. Growth of Bangladesh’s RMG Export and Market Diversification

Bangladesh's RMG Export to World

Million US$ Total

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

EU Countries 7218.25 7190.75 10519.84 11375.56 12564.85 14745.39

EU % of World 58.46 57.54 58.72 59.59 58.40 60.21

Growth% -0.38 46.30 8.13 10.45 17.35

USA 3693.40 3628.05 4625.16 4529.40 4996.58 5141.38

% of USA 29.91 29.03 25.82 23.73 23.22 20.99

Growth% -1.77 27.48 -2.07 10.31 2.90

Canada 587.05 595.55 894.67 874.85 980.26 1001.97

% of Canada 4.75 4.77 4.99 4.58 4.56 4.09

Growth% 1.45 50.23 -2.21 12.05 2.22

Non-Traditional Markets

Australia 49.29 85.56 192.90 307.54 428.44 430.76

Brazil 39.57 45.17 94.64 127.78 171.84 170.24

Chile 6.41 8.09 12.93 16.93 28.31 33.01

China 9.49 18.95 52.81 104.52 139.14 241.37

India 10.94 12.53 35.94 55.02 75.21 96.25

Japan 74.33 173.32 247.51 403.65 478.48 572.27

Korea Rep. 5.42 22.36 47.21 80.01 114.39 135.60

Mexico 81.88 61.41 81.16 98.65 110.21 124.63

Russia 16.16 20.39 51.86 76.49 139.55 207.74

South Africa 42.51 36.26 48.43 55.76 57.66 48.55

Turkey 239.54 306.27 518.32 355.93 415.31 622.37

Other Countries 273.54 292.06 491.57 627.60 815.50 920.36

Sub-Total (Non-Trad.) 849.07 1082.38 1875.28 2309.88 2974.04 3603.15

% of Non-Traditional 6.88 8.66 10.47 12.10 13.82 14.71

% Growth of Non- Traditional 27.48 73.26 23.17 28.75 21.15

GRAND TOTAL 12347.77 12496.72 17914.95 19089.69 21515.73 24491.88

% Growth 1.21 43.36 6.56 12.71 13.83

Trend Growth rate (2008-2014) 14.6% Export Promotion Bureau (EPB), Compiled by: RDTI Cell, Bangladesh Garment Manufacturers and Exporters

Association (BGMEA). http://www.bgmea.com.bd/home/pages/TradeInformation

26

Table 2. Employment in Bangladesh’s RGM Industry

Year Employment

(Million Workers) Year

Employment

(Million Workers)4

1984-85 0.12 2000-01 1.80

1985-86 0.20 2001-02 1.80

1986-87 0.28 2002-03 2.00

1987-88 0.31 2003-04 2.00

1988-89 0.32 2004-05 2.00

1989-90 0.34 2005-06 2.20

1990-91 0.40 2006-07 2.40

1991-92 0.58 2007-08 2.80

1992-93 0.80 2008-09 3.50

1993-94 0.83 2009-10 3.60

1994-95 1.20 2010-11 3.60

1995-96 1.29 2011-12 4.00

1996-97 1.30 2012-13 4.00

1997-98 1.50 2013-14 4.00

1998-99 1.50 2014-15 4.00

1999-00 1.60 Bangladesh Garment Manufacturers and Exporters Association (BGMEA)

http://www.bgmea.com.bd/home/pages/TradeInformation

It is noted that growth in the non-traditional market was very rapid. Among the traditional markets,

the share of EU has increased overtime, while the share of US has decreased. Among the non-

traditional markets, Japan, Turkey, Australia and China are the most important ones. This trend of

market diversification is a good sign for stability of export in the international market.

The world’s largest apparel brands and retailers originate in the US, EU and Japan. All the world’s

20 largest apparel companies by brand value—the focus of the empirical analysis—originate in

these three countries and region. A majority of them outsource their production to Bangladesh,

such that they are de facto participants in the same value creation chain (Appendix 1).

The US and the EU are the world’s largest importers of garments. In 2014, the US accounted for

about a fifth of the estimated $1.11 trillion total global apparel market, and this share is expected

to grow in the coming decade (US Congress Joint Economic Committee 2015). Most apparel sold

in the US and the EU is produced overseas, mostly in emerging markets, with China being the

largest producer, accounting for 35%-40% of imports to these markets. These countries are also

the major markets for Bangladesh’s garment exports. According to data by the Central Bank of

Bangladesh, The EU takes the largest share of Bangladesh’s exports, with Italy—the largest EU

market—accounting for almost 20% of the total. About a fifth of Bangladeshi exports, more than

80% of which are garments, is destined to the US. The US Office of Textile and Apparel (OTEXA),

which collects data on apparel import trends to the US, reports that, as of 2015, Bangladesh was

the third largest source of apparel imports to the US (after China and Vietnam), with 6.3% of the

total and is among the few countries whose shares of US imports have increased in recent years.

4 This aggregated level is the only level for which employment data are available at the time of data analysis. These

figures are based on BGMEA estimates.

27

Chapter 2 The Conceptual Framework of the Analysis

Supply chains describe the sequence of activities that firms undertake to create value to their

consumers, including the various steps of production and related activities, such as marketing,

sales and service (Porter 1980; Hult, Ketchen and Slater 2004). Although it is possible for a single

firm to implement the entire supply chain, contemporary chains usually involve complex structures

of co-specialized firms with different sources of value creation, each focusing on a single task. In

global supply chains, participants are typically located in different countries, and inputs and

outputs cross national borders as they are being transferred among the participants (Kleindorfer

and Wind 2009; Elm and Low 2013; UNIDO 2015).

Supply chains involve two different yet closely related dynamics: value creation and value

appropriation. Although the two are intimately related—value must be created for it to be

appropriated, and the anticipation of value appropriation determines the incentives for value

creation—they are nonetheless distinct (Adegbesan and Higgins 2011; Molloy and Barney 2015).

Value creation describes the input/output processes whereby resources are being transformed: each

producer purchases inputs and adds value to create an output that is sold to producers of the

successive stage of production. It represents the net value contribution made by each participant

towards the combined value creation of the chain as a whole. Each participant in the chain is both

a buyer and a seller, and in these roles, participates in two markets that often differ considerably

in their competitive structures and sources of competitive power. The aggregated value-added

contributions of all the participants form the combined value created by a supply chain. Value

appropriation is the share of this value that is captured by individual participants.

As the net addition by a firm, value creation is typically measured by the difference between sales

and the purchase of components, materials, and services from other firms. Value appropriation is

approximated by profit margins, which reflect the difference between total income and total cost

incurred in the production5.

Competition in supply chains takes place at two levels. At one level, subgroups specializing in

different value-added activities (e.g., raw material producers, manufacturers, global brands,

retailers) compete for their collective share of value appropriation. But competition is taking place

also within these groups, among firms with similar specializations, which are competing with each

other in both the market for resources as they seek to increase their value creation, and in the

market for buyers (consumers), which determines their value appropriation vis-à-vis other

members of their sub-group.

2.1 Salient Differences Between Value Creation and Value Appropriation

Value creation and value appropriation differ from each other in several important ways. For one,

they originate in different sources and are realized in different arenas. Value creation is determined

5 While value creation and value appropriation are conceptually distinct, their measurement overlaps in part. For

instance, the costs of purchases from other firms are included in the calculation of value added (value creation) and

in profits (value appropriation). However, profit calculations include, in addition to these costs, other production

costs, including labour expense, the cost of capital and depreciation expense.

28

by the amount and quality of factors of production available to firms and by their ability to utilize

them efficiently. Value appropriation, in contrast, is shaped by the value that consumers assign to

what firms produce, expressed in purchasing behaviour and willingness to pay. It is determined by

the competitive positions that subgroups and individual participants within them hold vis-à-vis

other subgroups and peers within them (Porter 1980; Bowman and Ambrosini 2000; Koopman et

al. 2010).

The determinants of value creation and value appropriation combine those that are external to firms

(and not under their direct control) and others that are internal to them. External determinants of

value creation are related to the availability and quality of factors of production that are accessible

to firms. With the occasional exception of very large firms that might be able exert influence in

certain circumstances, firms are largely dependent on the environmental context in which they are

based for the provision of factors of production. Firms’ ability to access these factors of production

and to utilize them effectively towards the creation of value depends on their own managerial skills

and organizational capabilities.

In relation to value appropriation, industry structures—as they affect the level of concentration,

the presence of substitutes, and switching costs—are external determinants of firms’ ability to

capture value, in that they determine bargaining power. Firm-level sources of value appropriation

relate to the firm’s ability to differentiate itself within its industry from competing alternatives and

increase switching costs that are firm-specific. Sources of such differentiation include the

possession of specialized knowledge and mutual dependency between buyers and sellers.

Bargaining power is determined also by the market scope of participants, which affects the scarcity

or abundance of their capabilities in particular locations—what Baldwin (2012) named ‘smile

curve economies’ (Brandenburger and Stuart 1996; MacDonald and Ryall 2004; Chatain and

Zemsky 2011; Adegbesan and Higgins 2011; Molloy and Barney 2015).

It follows from these differences that value creation and value appropriation require different

skills. Value creation is determined by firms’ ability to access factors of production and utilize

them effectively. Value appropriation rests on firms’ ability to differentiate themselves by

effectively engaging with customers, identifying their value perception (demand) and delivering

the products and services that will meet them.

Value creation and value appropriation differ also in terms of the relationships among the

participants associated with them. Value is created through collaboration, and it is an activity in

which all participants have shared and joint interest—increasing the combined value created, at its

essence a win/win situation. Moreover, since value is created jointly and is dependent on the

combined characteristics of all the participants, there are reciprocal interdependencies among

them, whereby each participant depends on adjoining participants to perform its own role. Value

appropriation in contrast represents competing interests, that is, who gets bigger shares of the

combined value created and, as such, entails zero-sum solutions, whereby interests of different

participants are in competition with each other. Here the outcome is dependent on the strength and

negotiating power of various participants relative to each other. Therefore, participants in supply

chains are tied up in simultaneous relationships of collaboration and competition (Brandenburger

and Stuart 1996, 2006; MacDonald and Ryall 2004; Adegbesan and Higgins 2011).

29

The challenge in creating sustainable supply chains is striking a balance between the opposing

forces of collaboration and competition that underlie the twin dynamics of creating and

appropriating value. Striking such a balance is particularly challenging when there are power

asymmetries among different participants in the chain, whereby the outcome of the negotiations

could be dictated by the powerful participants. Table 3 presents the defining features of value

creation and value appropriation and highlights the differences between them.

Table 3. Value Creation and Value Appropriation: Defining Features

Value creation Value appropriation

Definition Net value added to a production

chain

Share of gains of total value

created by a production chain

Measures (Sales – purchases) Profits = (total income – total

costs)

Determinants:

Internal to firms

Quality and efficient utilization

of factors of production

Consumers view of value;

negotiating power vis-à-vis

consumers

External to firms Abundance and quality of factors

of production in markets

accessible to firms

Industry structure: level of

concentration

Skills required Production management Marketing/branding

Competitive arena Market for factors of production Market for consumers

(internal/external to the supply

chain)

Relationships among

participants

Collaborative (win/win);

Interdependencies

Competitive (zero sum game)

Total income = sales, income from tangible/intangible assets.

Total costs = purchases from other firms; cost of production (labour, capital), asset depreciation, inventory.

2.2 The Participants in Global Supply Chains; Lead Firms and Other Participants

Participants in the value chain differ in their ability to create and appropriate value, depending on

their sources of strength, position in the supply chain, and bargaining power (Chatain and Zemsky

2011). Particularly notable in this regard is the distinction between what is known as the ‘lead

firms’ (Dedrick et al. 2009, 2011) and the other participants.

Lead firms create, coordinate and manage the supply chain, and hold the ultimate responsibility

for the final product. They determine what is to be produced, where, by whom and at what price,

and they oversee the circulation of intermediaries among the participants along the supply chain.

Their financial, organizational and institutional prowess enables them to mobilize resources and

absorb the risk inherent in global supply chains. As those at the front end of the chain, they interact

directly with the final consumers and act as the guarantor of quality for them. The lead firms are

also the ‘market makers’ for the end products and link the other participants to global markets that

are external to the chain, thus commanding the ultimate responsibility for the existence and

survival of the chain. Their ability to ensure these outcomes depends on their competitive

performance in markets that reside outside the chain. Hence, the success of the lead firms is critical

30

for the existence of the chain. In parallel, it is also tightly dependent upon the efficient functioning

of the supply chain, creating strong interdependencies among the participants (Sturgeon 2002;

Jacobides et al. 2006; Wind et al. 2009; Kunreuther 2009; Dedrick et al. 2009, 2011).

Unlike lead firms, who create value through integration and the bringing together of multiple

participants into a coordinated flow of inputs and outputs, other participants create value via

specialization. They contribute specific output towards the creation of the final product and are

distinguished by their distinctive specialization in a single activity along the chain.

Lead firm differ from other participants also in terms of their bargaining power. A notable source

of bargaining power of lead firms, and a prominent feature that sets them apart from most other

participants, is their global scope and mobility, which extends the scope of the market available

for them and affords them considerable flexibility. Other participants in supply chains are often

constrained by national borders, and the scope and terms of their market access are dependent on

their governments’ cross-border policies. This puts the lead firms in an advantageous position vis-

à-vis other participants. This characteristic is almost a given, not something that other participants,

who wish to capture more value can easily reach. Lead firms have access to financial markets and

an accumulation of knowledge, skills, technologies and managerial capabilities that make it

difficult for suppliers and participants below suppliers to match.

Furthermore, as the creators of differentiated, proprietary products, the lead firms compete in

oligopolistic industries characterized by high barriers to entry, with relatively small number of

large players. This industry structure stands in contrast to those of most other participants who

produce less differentiated products and operate in markets that, to a greater extent, resemble

competitive markets. In such markets, firms are much smaller and have minimal ability to

command prices for their output that are higher than market price. These differences affect the

terms of the negotiation between the lead firms and other participants, and afford lead firms strong

bargaining power in appropriating value (Chatain and Zemsky 2011). Table 4 illustrates the vast

size differential between the lead firms and other participants in the garment industry.

Table 4. Size Differential Among Participants in Global Supply Chains:

The Garment Supply Chain, 5-year average (2011-2015)

Average per firm

Sales

(export)*

Mil. US$ Employment N

Bangladesh’s RMG

Manufacturers** 4.65 1,276

Leading global apparel

companies 3,984 30,567 Own calculation based on data in Appendix 1 and Figure 8.

* The entire production of Bangladesh manufacturers is exported; therefore, export figures represent their total sales.

**Data for Bangladesh’s manufacturers are averages across the population of Bangladesh’s RMG manufacturers.

31

Chapter 3 Findings of the Analyses of the Garment Supply Chain

Figure 2 describes the value chain of garment production, from the cotton fields and the production

of yarn where the initial raw material is produced, to the retail stores that bring the products to the

final consumers.

Figure 2. Ready-Made Garment Supply Chain

The figure illustrates the variety of the participants involved in garment production and the nature

of their activities. These participants differ considerably in terms of their size, resource needs and

sources of differentiation. They operate in industries that vary considerably in terms of their

competitive dynamics, industrial structure and the number and nature of the firms competing. Due

to these disparities, participants hold a range of positions within the supply chain with substantial

Raw Material

Fabric/Yarn Production

Garment Production

Distribution Sales

Participants

* Cotton growers

* Fiber producers

Textile manufacturers

* Garment manufacturers

* Brands/retailers

* Brands/retailers

* Buying houses

* Trading companies

* Brands/retailers

* Department stores

Value Contribution to the Supply Chain

* Natural fiber (Cotton, wool, silk)

* Synthetic fiber (polyester, nylon, rayon)

* Spinning

* Knitting

* Weaving

* Dying

* Printing

* Manufacturers: ready-made garment

*Brands/retailers: design, demand forecast, quality control

* Sea/in-land transport

* Storage

* Warehouse handling

* Branding, marketing

* Pricing

* Inventory management

Manufacturers Brands/Retailers

32

power asymmetries among them that affect the terms of their negotiations with other participants

and their ability to create and appropriate value (Gereffi and Memedovic 2003; Dedrick et al. 2009,

2011).

Figure 2 shows that the global garment value chain is made up of two sub-chains. At the broad

level, garment production is constructed and managed by global brands and retailers who act as

the lead firms; however, with a few notable exceptions, they usually do not own the backward

value-creation functions. Garment manufacturers are another player in this value chain, who also

have their own supply chain, the one that they construct and control which consists of the backward

activities required to create garment. Below we describe the value creation activities implemented

by the different participants and the benefits that accrue to them via their participation in the supply

chain.

3.1 Value Creation

Cotton Growers

Cotton growers produce the raw materials, an essentially undifferentiated commodity,

distinguished by the type of cotton that grows in different parts of the world and which are suitable

for different kinds of garments, and by government policies that determine market access and the

terms of trade. Cotton prices are set in the global market, with minimal if any influence and

discretion for individual growers. Cotton growing requires specific weather conditions and arable

land; therefore, it takes place in only certain parts of the world and is exported from those locations.

The top three cotton exporting countries in 2013 were the US, India and Australia—with a

combined market share of about 70% of world export. The major cotton importing countries in

2013 were China, which imported about 45% of world cotton, followed by Turkey, Bangladesh,

Vietnam and Indonesia. Since cotton growing is highly sensitive to weather conditions, crops and

exports fluctuate considerably year by year and with them also world prices of cotton (The Textile

Think Tank 2014).

The annual requirement of raw cotton for textile production in Bangladesh is estimated to be

around 2.5 million bales. Local production supplies only about 4%-5% of this demand, while the

remaining 95%-96% is fulfilled by import. In 1972, Bangladesh established the Cotton

Development Board under the Ministry of Agriculture with the mandate of promoting cotton

cultivation in Bangladesh. Although the sector had grown, it had not matched the local demand of

textile production that has been growing at a more accelerated pace (Mandol 2008).

Textile Producers

Spinners purchase cotton in raw form from the growers and turn it into yarn by cleaning and

spinning. Yarn is used by textile producers to produce fabric, either grey or finished, through

knitting or weaving, dying and printing. According to Bangladesh Textile Mills Association

(BTMA), as of 2015, 413 textile mills operate in Bangladesh, producing more than 11 million

kilograms of fabric. This represents double the size a decade earlier, when 260 mills produced 5.5

million kilograms, but despite of this impressive growth, local production of fabric does not meet

the full demand of local production of RMG; therefore, Bangladesh’s garment manufacturers rely

in part on imported textile. According to data collected by the Bangladesh Knit Manufacturers and

Exporters Association, light knitwear production is based on 80% locally produced fabrics. The

33

BMGEA estimates that the corresponding figure for woven manufacturers is 35%-40%. Some of

Bangladesh’s textile producers are vertically integrated backward and assume internally the

spinning.

Accessory Producers

In addition to fabrics and wool, garment producers use various kinds of accessories, including

zippers, buttons, labels, hooks, hangers, elastic bands, thread, backboards, butterfly pins, clips,

collar stays, collarbones and cartons. Using accessories provides the manufacturers opportunities

to add value, differentiate their garment and command high prices. Thus, they regard the value of

the accessories to be on par with that of the fabrics and allocate substantial resources to the

purchase of accessories. Industry analysts estimate that accessories account for about 35% of the

direct purchases of manufacturers towards the production of finished garment (Mirdha 2011).

The growth of garment production in Bangladesh spurred the development of local accessories

production, which has accelerated rapidly in recent years and has come to replace most of the

imported accessories on which Bangladesh manufacturers relied in earlier years, making

Bangladesh almost self-sufficient in accessory manufacturing. According to data from Bangladesh

Packaging Manufacturers Association, in 2015, 1,379 packaging and accessories factories

operated in Bangladesh, up from 500 in 2000 and 1000 in 2010. About half of these factories

produce packaging material (e.g., corrugated cartons). The Association estimates that locally

produced accessories account for about 15%-20% of Bangladesh’s garment exports.

Garment Manufacturers

The Nature of the Business

Manufacturers create value by transforming fabric (or wool in the case of sweater producers)

purchased from textile and wool producers—in Bangladesh or elsewhere—into ready-made

garments. The sources of value creation of the manufacturers lie in generic manufacturing skills

that reduce transaction costs and build economies of scale. The value added by the manufacturers

is the difference between fabric and other intermediaries (e.g., accessories, packaging), as well as

machinery that they purchase and the price at which they sell ready garments to the brands and

retailers.

Some manufacturers have expanded through backward integration and internalized the production

of fabric and accessories. The production of fabric and garments, however, takes place in different

facilities with shared ownership. Bangladesh’s government has actively encouraged local

purchasing of fabrics and backward integration by garment manufacturers by offering cash

incentives. The intention is to reduce imports and encourage the growth of local industry. The

prevalence of the backward integration by garment producers is not known, but industry observers

suggest that it is not widely spread and common mostly among the larger garment producers.

The garment industry in Bangladesh has two main sections: knitted garments (e.g., sweaters, T-

shirts) and woven garments (e.g., shirts, trousers). The industry started with production of woven

garments, carrying out the characteristic cut, make and trim (CMT) segments of work. Over time,

however, knitwear has become more important in the product mix, going up from just above a

15% share of exports in 1993 to more than 50% share of exports in 2015 (BGMEA). The knitwear

34

segment’s rapid growth in recent years could be the result of the ‘China effect’, as higher wages

in China have led to the shift of some labour-intensive production segments to other countries (see

Chandra et al. 2013 for a comprehensive analysis of this phenomenon; also see Frederick and

Staritz 2012 for an analysis vis-à-vis garments). An important factor in the changing composition

is the higher local value added in knitwear compared to woven wear. With yarn now produced

locally, value added is 75% in the case of knitwear as against 25% in the case of woven wear.

In terms of the production network, RMG firms in Bangladesh can be divided into three tiers. Tier

1 firms are those that secure orders from buyers or intermediaries. They are generally the larger

units, usually employing two thousand or more workers. There are about one thousand Tier 1

firms, accounting for some 20% of the total number of garment firms. Tier 2 firms are medium-

size units with a few hundred workers. They are sub-contracted by Tier 1 firms and are often used

to fill capacity gaps or to produce specific lines. The important characteristic of these firms,

however, is that most of them do not get orders directly from buyers. Some medium-size units do

get direct orders when the buyers are not able to complete their buying requirements from the

larger units. Tier 3 firms are those supplying inputs, various items of trim or accessories. With the

growth of Bangladesh’s garment industry, suppliers of various accessories, such as zippers, set up

factories within the country using the foreign direct investment (FDI) route.

The Local Value Chains

The local RMG value chain refers to the value created in different stages, starting from primary

raw material (which could be cotton, yarn or fabric) to the final RMG product ready to leave the

Bangladesh border. This chain presents the share of different costs in the value of a product. The

global value chain starts after the product crosses the Bangladesh border and ends at the final

consumer of the RMG product. For example, regular denim jeans sold to buyers for the price of

$6.5 would have the value chain illustrated in Figure 3. It is noted that 53% of this value is created

by the materials (cotton fabric and accessories), 28% value is created by cutting and making and

the remaining 19% include transport cost, administrative cost, profit and so forth. In case of cotton

T-shirts and woven shirts, the general trend remains the same. The largest cost component is raw

materials/inputs (half to three-fourth of the total production value), followed by the cutting-or-

making (CM) cost (one-third to one fourth), and administrative and other costs (less than one fifth)

as illustrated in Figure 4. Thus, to increase competitiveness, the producers can either reduce

material cost or reduce labour cost at a certain level of technology.

35

Figure 3. Value Chain of Denim Jeans with FOB Price of $6.5

Figure 4. Value Chain of Cotton T-Shirt with FOB Price of $2.5 to $3

Figure 5. Value Chain of Woven Shirt with FOB price of $4.50

Authors’ calculations based upon interviews with respective producers in Bangladesh.

Material (53%)

• Cotton fabric (75%)

• Accessories (25%)

Cutting and Making (28%)

• Design, cutting, sewing and assembling (80%)

• Ironing and finishing (20%)

Others (19%)

• Transport (23%)

• Administrative cost (31%)

• Profit (19%)

• Others (27%)

Material (70%)

• Cotton fabric (94%)

• Accessories (6%)

Cutting and Making (22%)

• Design, cutting, sewing and assembling (80%)

• Ironing and finishing (20%)

Others (8%)

• Transport (27%)

• Administrative cost (26%)

• Profit (16%)

• Others (31%)

Material (54%)

• Cotton fabric (98%)

• Accessories (2%)

Cutting and Making (30%)

• Design, cutting, sewing and assembling (82%)

• Ironing and finishing (18%)

Others (16%)

• Transport (8%)

• Administrative cost (32%)

• Profit (21%)

• Others (39%)

36

The international value chain would cover the costs of transporting the goods from the Bangladesh

border to the destination port, customs duty, local transport from port to the warehouse, costs added

by wholesaler and then by the retailer.

The Production Process

After getting an order settled, manufacturers begin the production process of RMG products by

purchasing fabrics, either from local market or through import. The firms who have backward

linkages of converting cotton to produce fabrics enjoy cost and time advantages in this regard.

Design is provided by the buyer. The buyer sends the technical sheet and artwork of an order. By

following technical sheet and artwork, a pattern of each garment item should be made. Then the

producers create fit samples following the detailed instruction about the garments style. The next

step is to send the fit samples to the buyer for approval.

The manufacturers initiate their RMG production with finished fabrics except those who have

internalized the conversion of cotton into fabrics. Finished fabrics have three steps or levels: the

first level is for converting cotton to yarns (i.e., spinning), the second level is for converting yarns

to grey fabrics (i.e., weaving), and the third level is for converting grey fabrics to dyed, printed,

finished fabrics (i.e., dying, printing, or finishing).

Fabrics have to be cut according to the garment’s marker—a very thin paper which contains all

the parts of a particular garment. Then, all these parts are joined to make a complete product. After

completing the sewing process, a garment undergoes inspection to ensure it is fault free. At this

stage, the required ironing and finishing steps are performed. The complete garments are then

inspected again according to the buyer’s specification. Complete garments are packed in poly bags

per the specification of the buyers. To minimize damage, packed garments are cartoned according

to buyer’s instructions. After completing all the required processes, finally, garments are shipped

to the buyer.

Manufacturers start producing after receiving orders from lead firms so that the largest part of their

costs—the purchase of fabrics and other intermediaries—can be made upon securing the order,

diminishing and maybe eliminating altogether inventory costs 6 . However, even though the

manufacturers produce by orders, buyers may still refuse to take delivery of the final product due

to reasons such as failure to meet delivery time (often for reasons that are beyond the control of

the manufacturers) or failure to meet the exact specifications (e.g., colours do not match exactly).

In such situations, to recuperate some of their losses, manufacturers sell the merchandise in special

domestic markets for rejected RMG goods. Estimates by industry practitioners suggest that sales

on these markets account for about 1% to 2% of the total garment production in Bangladesh. Prices

in these markets vary, depending on the quality of the rejected products, but in general are

considerably lower than the tag price.

6 There are some exceptions for this when manufacturers use standard fabric in their production. These manufacturers

keep stock in bonded warehouse facilities, where garment exporters can store imported raw material without paying

duties and taxes.

37

Cost of value creating activities by manufacturers

In the absence of the firm-level data desired for the analyses, we rely on publicly available

aggregated data to outline a picture of the aggregated cost structure of Bangladesh’s garment

manufacturers. This exercise naturally hides variations across individual manufacturers, and its

results should be interpreted with this feature in mind.

We base the calculation on the Bangladesh Garment Manufacturers and Exporters Association’s

(BGMEA) estimate of the cost breakdown of the total FOB cost7 of Bangladesh manufacturers.

According to this estimate, the total cost splits between 75% purchases of raw materials,

intermediaries and machinery, with the remaining split between 15% labour costs and 10% tax and

overhead costs.

We calculate the cost of purchases based on import and local production data, and extrapolate from

these figures the other costs. As noted above, garment production in Bangladesh consists of two

major categories: woven and knitwear, with the latter split between heavy knitwear (sweaters) and

light knitwear. These categories use different raw materials and intermediaries and have different

production processes. The major input used in the production of sweaters is wool (synthetic and

fibre). Woven production is based on fabrics and sewing threads. Both products use accessories.

These raw materials and intermediaries are purchased both locally and via imports. All the wool

used in the production of sweaters is imported. Fabric and sewing threads are purchased both

locally and via imports, in different combinations for different product categories, and accessories

are purchased mostly locally.

Imports data are available at a six-digit level and allow the identification of imports related to

garment production with precision. Data on local production of fabric are not collected and not

known8. In the absence of hard data, we calculate an industry-average share of locally purchased

fabric based on BGMEA estimates of local purchases by different product categories, multiplied

by the respective category size (based on export shares) of the shares of locally purchased fabrics

(Table 5).

7 FOB (Freight on Board or Free on Board) price is the price paid by a buyer to a manufacture ‘at the factory door’,

that is, before shipping and import fees. As such, it is treated as the price for all labour and non-labour production

costs.

8 The industry body overseeing fabric production is Bangladesh Textile Mills Association. It does not collect data on

local production.

38

Table 5. Locally Purchased Fabric by Bangladesh’s Garment Manufacturers

% total garment

exports, 4-year

average (2011-

2015)

Raw material and

intermediaries used

in the production

Locally-purchased

fabric as % of total

purchased fabrics

Knitwear

of which

49%

Light knitwear 37% Fabrics 80%

Heavy knitwear

(sweaters)

12% Wool 0

Woven 51% Fabrics 35-40%

Industry average 48% BMGEA exports statistics http://www.bgmea.com.bd/home/pages/TradeInformation, and BGMEA estimates.

The production of accessories for garment is categorized by 36 different kinds of accessories

including buttons, zippers, poly bags, threads and hangers. Data on local production of these items

is collected in the aggregate, known as ‘deemed export’, because it is sold to exporting RMG

manufacturers and assembled in a finished product that is exported. These data have been collected

annually for the last decade, and we use them to calculate the costs involved in accessories

purchases.

In addition to these purchases, which constitute the manufacturers’ variable purchases usually

placed upon receiving an order, garment production also requires fixed investment in special

machinery. All these machineries are imported, enabling us to measure their costs with precision

based on import data.

We have included an additional category for purchases of items such as chemicals (e.g., washing

chemicals and others) and dyes, leather patches, different types of embellishments, metal belts,

poly bags and other packaging material, price tags and the like, as well as generic machines and

parts used for the operation of the garment machinery. It is not possible to identify the precise

amounts of these purchases at the aggregate industry level because they constitute small parts of

larger categories and the shares that are purchased by garment manufacturers are not known. To

account for these purchases, we add 25% of the total of the other purchases as miscellaneous

purchases. The sum of the fabrics, accessories, machinery and miscellaneous purchases forms the

total purchases.

We have used the BGMEA estimates of the cost structure of garment manufacturers to extrapolate

the total costs from these figures. From that we have calculated the cost of labour (15%) and taxes

and overheads (10%). We have divided these amounts by the number of establishments to receive

average cost per establishment (Table 6). The time window for this analysis is determined by data

availability. Harmonized System (HS) codes at the six-digit level, which classify the import data,

are only available since 2011-12 fiscal year. Data for previous years are available only at the two-

digit level. 2014-15 data were the latest available at the time of collection.

39

Table 6. Cost Breakdown of Value Creation Activities: Bangladesh’s Manufacturers, in Mil. US$

Purchases

Breakdown of purchases Labour

Taxes &

overheads

Total

costs

Fabrics9

(of which

imports10)

Accessories

Capital

machinery

for

garment11

Misc.

% total costs 75% 15% 10% 100%

2011-12 12,732.1

6,569.1

(3,416.0) 3,075.0 541.6

2,546.4 2,546.4 1,697.6 16,976.1

2012-13 14,488.5

7,059.7

(3,671.0) 4.100.0 431.1

2,897.7 2,897.7 1,931.8 19,318.0

2013-14 14,214.1

6,098.9

(3,171.4) 4.750.0 522.4

2,842.8 2,842.8 1,895.2 18,952.1

2014-15 17,783.4

7,976.0

(4,147.5) 5,600.0 650.8

3,556.7 3,556.7 2,371.1 23,711.3

4-year average 14,804.5

6,925.9

(3,601.5) 4,381.2 536.5

2,960.9 2,960.9 1,973.9 19,739.4

4-year average per establishment12 (‘000 US$)

3,082.4 616.5 411.0 4,109.9

Memorandum items: Average annual exchange rate taka/US$

2011-12 75

2012-13 81

2013-14 77

2014-15 80

Own calculations based on import data from Bangladesh Bank, HS 6-digit codes and establishment data from

BGMEA. http://www.bgmea.com.bd/home/pages/TradeInformation

The cost estimates in Table 6 might reflect bias on several grounds. For one, parts of the analyses

are based on estimated values, including the shares of fabric purchased locally and the quantities

of miscellaneous purchases. However, these estimates are well informed, made by the most

knowledgeable industry analysts whose expertise offers confidence in the precision of the

9 The ‘textile fabric’ category includes the following HS 6-digit codes: 074015 (Articles of apparel & clothing

accessories etc.), 115007 (Woven fabrics silk or silk waste), 115100 (Wool, fine or coarse animal hair), 115204

(Cotton sewing thread), 115207 (Cotton yarn other than sewing thread), 115208, 115209, 115210, 115211, 115212

(Woven fabrics of cotton, various kinds), 115401 (Sewing thread of man-made filaments), 115407 (Woven fabrics of

synthetic filament yarn), 115408 (Woven fabrics of art fila yarn), 115500 (Man-made staple fibers), 115600 (Wadding,

felt and nonwovens; special yarns etc.), 115804 (Tulles & other net fabrics), 115806 (Narrow woven fabrics), 115807

(Woven fabrics of synthetic filament yarn), 116000 (Knitted or crocheted fabrics), 126603 (Parts, trimmings &

accessories), 157319 (Sewing/knitting needles, etc.). 10 Import figures are fresh Letter of Credit (LC) opening figures. 11 The ‘capital machinery for garment’ category includes the following HS 6-digit codes: 168445 (machines

preparing textile fibers), 168446 (weaving machines, looms), 168447 (knitting machines stitch bonding), 168452

(sewing machines). 12 When calculating the average per establishment, we use the BGMEA data on the number of establishments in

existence every year. However, while these are the numbers of registered establishments, not all of them are

necessarily in operation all the time. It is common that establishments, and particularly the smaller ones, cease

production temporarily for a variety of reasons. Because of the temporary nature of these closures, such establishments

not removed from the list.

40

estimates and is likely to minimize potential bias. Nonetheless, by their very nature, they can only

be treated as estimates and do not match the precision of hard data.

Other potential biases could originate in the inability to identify users of imported and locally

produced fabrics and accessories outside garment manufacturers. For instance, fabrics are used

also for home textile (e.g., carpets, towels, bed spreads). In the absence of data on the shares

consumed by garment producers, we assigned the totals entirely to them. This is likely to bias the

purchases upwards. However, there is reason to assume this potential bias is insubstantial because

other users are very small in comparison to garment manufacturers.

Some additional costs could have been omitted because they are not systematic and cannot be

accounted for. Example include cost incurred as a result of delay in receiving payment. Nor do we

account for depreciation costs of machinery that are subject to considerable variations across

machines and factories and cannot be incorporated systematically in the analysis. Given the small

share of these costs in total costs we assume that a potential bias on this ground would be minimal.

Lastly, fluctuations of the Bangladesh taka in relation to the dollar—the currency which dominates

import purchases—may distort comparability over time. We believe this potential bias has little

impact because the fluctuations during the study period were very small (Table 6).

Lead Firms

At the front end of the garment supply chain are the lead firms—represented by brands and

retailers—who engage directly with the final consumers. This diverse group includes firms that

vary in terms of their business models, the consumers they seek to reach (e.g., luxury, high street

and discounters) and the way they organize their production. A small number of firms control and

manage the entire chain, including the production. Notable examples include Zara and, to an

extent, Ralph Lauren. These firms have different supply chains with different relationships with

suppliers and varying approaches to sourcing (Bruce and Daly 2006), and as an overall group, lead

firms may include retailers who sell fashion as well as brands that internalize the retail function,

blurring the line between brands and retailers. The value creation activities of the lead firms are

diverse, ranging from brand creation to the management of the supply chain, and the retail function

(Figure 6).

41

Figure 6. Value Creation Activities of Lead Firms

Value Creation Activities

Brand

management

Demand forecast

Management of the global

circulation of merchandise

Sales management

Functions

performed

Design,

Marketing

Internal/outsourced

forecasting,

Big data (social

media) analysis,

Placing orders

Purchase garment,

Shipping to markets,

Custom clearance,

Warehouses/distribution

centres,

In-land shipping (to

stores/final consumers [e-

commerce])

Select retail space,

Management consumers’

sales experience,

Pricing strategy,

Inventory management

SUPPLY CHAIN CONSTRUCTION AND MANAGEMENT

Manufacturers selection

Production oversight

Quality control

RISK

Fixed/variable costs

Inventory control

Reputational risk

GOVERNANCE

of the Supply Chain

Inputs/

Resources

Design and

marketing

staff,

Marketing

expenditure

Forecasting

department

Local

agents/Outsourcing

department

Costs of

circulation,

Outsourcing

department

Retail rental

costs,

Costs of sales,

Sales staff,

Inventory cost

Brand Management

One of the most important value creation activities implemented by the lead firms is the creation

and maintenance of the brand. Brands embody a promise of value, quality and benefits that differ

from those of the competitors and create expectations regarding future performance. As Godart

expressed it, they ‘…infuse meaning and symbolic context into garments, turning pieces of apparel

into symbols of identities, personalization and expression of individuality via fashion. . . . They

shape fashion trends…’ (Godart 2012, p. 12), in essence representing all the things that transform

a piece of garment into more than its functional purpose and give it what Professor White of the

New York Fashion Institute of Technology describes as ‘the persona of the brands’ (private

communication, NYC, April 12, 2016).

Different indicators are used to measure brand value, seeking to quantify the factors that make a

brand appeal to consumers such that they are willing to pay a premium to acquire it13. These

13 The commonly used accounting measures for assets of this kind are goodwill, the difference between a firm’s market

value and its book value, and intangible assets. These usually refer to assets such as patents, trademarks, copyrights,

formulas, and as such are not applicable to the fashion industry. In addition, differences in accounting standards and

reporting procedures across countries, in the context of our study–between the US GAAP and the IFRS–jeopardize

the comparability of these measures across global fashion companies that employ different accounting standards. We

rely instead on the commonly used indicator in the industry–brand value.

42

measures rely on different conceptualizations of brand value and employ different methods to

measure it (Hague 2010; Seddon 2013). In Table 7 we present the brand value estimates for the

world’s largest (by brand value) apparel companies compiled by BrandZ, one of the most

prominent such measures. Its evaluation method is based on a quantitative research of two million

consumers in 30 countries combined with financial analysis that quantifies asset values. The data

show vividly the value of brands to apparel firms—a value greater than all their other assets

combined.

Table 7. Brand Value: World’s Largest (by Brand Value) Apparel Companies, 2015

Brand value

Mil. US$ % Total assets

Zara [Inditex] 22,036 1,915

H&M 13,827 145

Uniqlo 8,074 n.a.

Next 5,973 129

Burberry 5,722 278

Ralph Lauren 5,643 103

Hugo Boss 4,320 220

Michael Kors 3,815 333

Lululemon 2,898 300

Tommy Hilfiger 2,580 n.a. Millward Brown BrandZ, IQ Capital

A crucial element in the value creation activities of lead firms, and most notable in relation to the

creation and maintenance of the brand, is their ability to recruit and keep human capital: highly

skilled labour whose creative minds and advanced managerial skills enable them to create and

sustain value. These high-skill, high-cost employees, while representing a relatively small part of

lead firms’ employees, are nonetheless the major determinants of value creation and account for

major part of the resources required to create value. According to data from the US Bureau of

Labour Statistics, they account for about one-third of the 1.9 million workers employed in 2015 in

the US apparel industry, spread among fashion and graphic designers, market research analysts,

marketing specialists, computer professionals, and fabric and apparel patterns makers. The

remaining two-thirds are retail employees, a majority of whom are shop-floor, low skilled,

relatively low paid employees, but they also include higher skilled ones, such as store managers,

accountants, auditors, buyers, purchasing agents, marketing and sales managers.

In Appendix 2, we present the cost of labour in the US for the major professions employed by

apparel companies. Similar patterns are apparent among global brands elsewhere. According to

Apparel Magazine, the average employment among the world’s largest apparel companies in the

2010s is more than 27,000 employees, spread across these and similar occupations.

Demand Forecast

The process that brings a piece of garment to the market realized by lead firms begins with demand

forecasting, a challenging task in the fashion industry. Market trends form and change very rapidly

and are subject to the vagaries of the weather, films, pop stars and football celebrities. According

43

to NPD, a US-based market research company, ‘No other industry changes as rapidly as fashion.

What’s hot today is blasé tomorrow. Innovation becomes retro. Seasons change. Hemlines rise and

fall. . . . A celebrity makes a fashion statement on the red carpet and suddenly your financial

statements are covered in red.’ (NPD 2016). Moreover, fashion purchases are often ‘impulse

purchasing’, decisions made at the point of purchase, making them difficult to forecast (Birtwistle

et al. 2003; Choi and Sethi 2010; Nenni, Giustiniano and Pirolo 2013; Ellis 2013). At the same

time, the combination of long lead times (orders are placed between 6 to 12 months and, in some

cases, up to 18 months before merchandise arrives in the stores) and short life cycle and short

selling seasons make the need for understanding future trends crucial in the fashion industry.

Lead firms allocate substantial resources to demand forecasting. The dominant practice is to rely

on specialized forecasting companies that predict the colours, fabrics and styles for upcoming

seasons and the likely magnitude of demand. In 2011, the fashion trend-forecasting industry was

estimated to have a global market value of $36 billion and was named ‘the new growth business.’

(Birtwistle et al. 2003; Barnett 2011; Nenni et al. 2013).

Getting accurate forecast is critical for firms’ ability to strike the delicate balance between excess

inventory, which causes overstocks and blocks the space for demanded products on the one hand,

and insufficient inventory that results in lost sales and damages the brand reputation on the other

hand (Sen 2008). The industry is so occupied with this challenge that Apparel Magazine has

recently referred to it as ‘the single worst scenario a retailer can face…’ and as ‘retailer’s biggest

fear’ (Apparel Magazine 2015). To minimize the likelihood of such outcomes, firms tend to order

slightly more than the anticipated demand and are often left with unsold merchandise at the end of

the season.

Management of the Circulation of Merchandise in the Supply Chain

The next step in the management of the supply chain includes selecting the outsourcing strategy

and the terms of the engagement with the manufacturers, whether direct or via an agent. The direct

model requires identifying and selecting specific manufacturers and for many companies also

includes some level of involvement with production in the form of quality control or safety

regulations.

As the orchestrators of the supply chain, lead firms bear the costs of the circulation of goods within

the supply chain. After purchasing the final goods from the manufacturers, the lead firms ship

them (mostly by sea) to the market and oversee custom clearance in the ports of destination. See

Appendix 3 for import duty on RMG to the major markets of Bangladesh’s production–Europe,

Japan and the US. The rise and fall in the cost of energy as well as regulatory changes that increase

the costs of crossing borders cause substantial fluctuations of these costs14. Freight cost from

Bangladesh to major destinations is estimated by BGMEA to be in the range of 16% of the price

of the merchandise.

Merchandise is then shipped in-land to distribution centres, which might be either wholly-own

(most common among the largest lead firms, notably in mature markets) or outsourced to what is

14 The recent introduction of new seaborne shipping rules, which requires shippers to verify container weights prior

to loading per revised regulations on Safety of Life at Sea (SOLAS) is a case in point. SOLAS is estimated to raise

the cost of trade by approximately 14% (Donaldson 2016b).

44

known in the industry jargon as Third Party Landers. The cost of establishing a modern, advanced

distribution centre of 75,000 square feet is estimated by industry analysts to range between $25-

$50 million (Mr Jordan Pious, Private communication, New York/Boston, March 2016). From the

distribution centres, the merchandise is shipped to the stores or, in the case of on-line purchases,

directly to the consumers. The complexity and cost of this activity has increased considerably with

the growth of online shopping and the need to ship individual items to multiple locations.

Although, to some extent, this cost increase might be weighted by the reduction in the high costs

of brick-and-mortar retail, the predominant tendency appears increasingly to maintain so-called

multichannel distribution, whereby consumers can simultaneously shop off and online. The most

successful brands, such as Zara and H&M, continuously increase the number of physical stores.

Sales and Pricing

The dominant contemporary trend is for brands to assume the retail function, and most of the

largest global brands operate their own stores, seeking to control the entire shopping experience

and treating it as an important part of their value creation activities (Sen 2008). In turn, large

retailers increasingly develop private label brands which they treat as full-blown brands, to be sold

exclusively in their stores, and to support them with marketing programs designed to create clearly

defined images. For example, Macy’s and Wal-Mart own, respectively, six and 14 private labels.

Establishing and running a retail network represents a major source of value creation by lead firms.

Appendix 4 presents information about the size of these firms’ global retail network. In Appendix

5, we present data on retail rental prices in major metropolitan cities around the world, where

global brands operate their stores.

A critical part of the sale is pricing strategy. Selecting the price point that generates the highest

sales and is consistent with firms’ objectives and promotion strategy represents a major challenge.

Lead firms invest substantial resources in understanding product-price elasticities and closely

monitor demand changes and market movement to make informed choices about prices throughout

the life cycle of a given item. Prices in the store may change as frequently as once a week and, for

some items, even more frequently (NPD 2016; Carroll 2012).

Industry analysts estimate that at most 20%-40% of merchandise is sold for the full price set up at

the time of entry to the market. Discounting is vast and has increased in recent years with the fast

fashion trend in which rapid turnover of merchandise has become a competitive imperative in and

of itself. The spread of online shopping has created a competitive environment in which consumers

are more reluctant to pay full prices than ever before (Potts 2016).

Supply Chain Management

Lead firms are crucially dependent on the supply chain for their survival, and the ability to manage

it effectively is a major determinant of their competitive performance. An article in The Sourcing

Journal, an influential business publication, referred to brands’ and retailers’ supply chains as ‘the

lifeblood of their organization’ (Donaldson T. 2016e). As noted, brands express a promise, and

firms’ ability to deliver the promise hinges on the quality and efficiency of their supply chains.

Such is the importance of the supply chain that the Apparel Magazine, a leading industry magazine,

expressed the view that ‘Apparel brands don’t compete–their supply chains compete.’ (Apparel

Magazine 2016). Other industry experts concur: ‘…The main competition is not between

45

companies, but between networks, and the best supply chain will win’ (Wind, Fung and Fung

2009). Indeed, the industry top performers–Zara and H&M–both excel in the management of

supply chain (albeit of very different structure). In 2016 H&M and Zara were ranked number five

and six respectively in Gartner’s ranking of world’s top 25 companies in terms of supply chain

management, the only apparel companies to feature in the list. This speaks for the competitive

value of the supply chains.

The value of efficient management of the supply chain has increased considerably with the

growing demand for frequent changes of merchandise in the store (Sen 2008; Choi and Sethi 2010).

The supply chain plays a key role in enabling firms to achieve this imperative. Speed has become

the new competitive edge in the fashion industry, giving rise to what is known as ‘fast fashion’

brands (Zara, H&M, Uniqlo and Primark among others), who attempt to deliver fashion on the

basis of ‘real-time’ demand and replace merchandise as frequently as on a weekly basis. These

firms are the industry’s top performers, illustrating the premium that consumers put on fast change

of merchandise in the stores (Bruce and Daly 2006; Gunasekaran et al. 2008)15.

Lead firms also incur substantial resources in setting up the global supply chain and connecting

with the manufacturers. The predominant mode for the implementation of this interaction is

through what is known in industry jargon as ‘direct sourcing’, that is, the establishment of wholly-

owned local offices in the producing countries. About 70% of Western buyers in Bangladesh

surveyed by McKinsey source directly, driven by the intention to establish direct relationships

with local manufacturers (McKinsey 2011). Their local agents, known as buyers, implement this

function. The buyers represent the brands in the manufacturing countries and, in this capacity, are

responsible for selecting the manufacturers and managing the relationships with them, including

price- and lead-time setting as well as quality control. Typically, the buyer operations are wholly-

owned subsidiaries of the lead firms, employing for the most part expatriates from the parent

company or its affiliates elsewhere (Lopez-Acevedo and Robertson 2016).

Our informal interaction with a number of buyers in Bangladesh—among them H&M, that

operates the largest buying function by a foreign brand in Bangladesh—offers anecdotal

suggestions that buyers are heavily involved with the activities of the manufacturers; they visit

factories frequently and maintain a hands-on approach to ensure quality standards and labour

conditions. They generally appear committed to Bangladesh, taking a long-term view of their

presence in the country and, in most cases, also of their relationships with manufacturers.

Risk Management

A major source of value creation by the lead firms is their assumption of the risk associated with

the construction and management of the supply chain. Risk confronted by the lead firms originates

in various sources. On the supply side, as supply chains have become more complex and

geographically spread, the risk associated with the management of such operations and the flow

of goods and intermediaries among them has increased considerably (Kunreuther 2009; Bishop

2016). British Standards Institution’s (BSI) Global Supply Chain Intelligence estimates that in

2015 alone, risk cost $56 billion, originating in losses on the ground due to cargo theft, natural

15 The pace of the industry had further accelerated recently with the spread of the ‘see now buy now’ trend, whereby

brands sell their merchandise during fashion shows. In the past, items presented in fashion shows were put for sale

in the next season, usually about six months later.

46

disaster and so on (Donaldson 2016a). Probably the most critical source of risk is related to human

and labour rights issues and the reputational risk associated with violations of these rights or

deviations from what appears, in stakeholders’ views, as proper norms of governance and

sustainability. Environmental compliance is also becoming a concern and increases the demand

for the establishment of green factories.

Moreover, unlike that of other participants in the supply chain, most of the costs of lead firms—

including the costs of brand building, retail, and labour—are fixed, at least in the short run, further

increasing their risk. Retail leases are typically signed for a period of 10 to 20 years, with severe

financial punishment for premature termination. Investment in brand building is by its very nature

long term and largely fixed. And with the exception of shop-floor employees in the stores which

account for small shares of labour costs, employment by the lead firms, in its various occupations

and professions, is permanent. These employment relationships are more permanent than those of

other participants in the supply chain. For instance, the employment relationships of Bangladesh’s

garment manufacturers with a majority of their labour force are much more flexible and can be

adjusted with minimal cost (e.g., personnel could be terminated by paying one to three months of

salary) to fluctuations in demand. Following the passage of the 2006 labour law, employment in

Bangladesh’s garment sector is more strictly regulated than that in most other sectors of the

economy but still highly flexible compared to that in the markets in which global brands operate

and recruit their employees16.

On the demand side, the fluctuations of demand for apparel and the challenge of predicting

demand, as noted earlier, entail high risk. Unlike other participants in the value chain, who produce

by orders, the lead firms assume production with limited ability to anticipate demand.

Corporate Governance of the Supply Chain

Notwithstanding some variations across lead firms, a majority of them—and notably those who

seek to establish long-term relationships with their suppliers—typically assume responsibility for

governance issues across the supply chain, including of factories to which they have neither

ownership ties, and in some cases, nor even permanent contractual relationships. In recent years,

particularly after the Rana Plaza tragedy, the governance of the supply chain has become a major

source of value creation activity, which consumes considerably more resources.

As part of their efforts to improve labour conditions and safety in garment factories in Bangladesh,

global brands and retails created the Accord on Fire and Building Safety. The Accord is a five-

year legally binding agreement between global brands and retailers and trade unions designed to

build a safe and healthy Bangladeshi RMG industry. It has been signed by more than 200 apparel

brands, retailers and importers from over 20 countries in Europe, North America, Asia and

Australia. Signatories include also two global trade unions, eight Bangladeshi trade unions and

four NGO witnesses. Three years on, substantial progress has been reached towards the

establishment of safe work conditions in Bangladesh’s factories17.

16 This represents an exception in Bangladesh’s labour market, where the share of informal employment was close to

90% in 2010, up from 78% in 2005-6. It is the highest share of informal employment of any country in Southeast

Asia (Chalabi 2014). 17 We will return to this issue in the following discussion.

47

In Table 8, we present a breakdown of the costs incurred by lead firms for their value creating

activities. Notable is the very large dispersion around the mean (the large values of the standard

deviation [S.D.]) of the cost breakdown, presumably a reflection of the large variations in firms’

business models and competitive strengths. The averages show that the largest share of costs goes

to general and administrative costs, which we regard as the overall cost of managing the supply

chain, including social costs. This agrees with the critical value of this function for lead firms, as

noted earlier. The second most significant element of the costs is inventory. Efficient supply

management can assist lead firms in reducing these costs as it enables them to lower the levels of

inventory.

48

Table 8. Cost Breakdown of Value Creation Activities: Lead Firms

World’s Largest (by brand value) Apparel Companies, 5-year Average (2011-2015).

Million US$ (% sales)

Brand Building

Supply Chain

Management Distribution and Sales

Adverti

sing

Selling

&

market

ing Staff

Selling general

& admin.

Rent

al

Invent

ory

Leasehold

improvement

American Eagle

64

(2.0)

83

(2.6)

750

(23.2)

277

(8.6)

314

(9.7)

605

(18.8)

Coach

176

(3.8)

875

(19.0)

1,982

(43.1)

264

(5.7)

494

(10.7)

613

(13.3)

GAP

599

(3.9)

599

(3.9)

4535

(29.3)

1,22

9

(7.9)

1,762

(11.4)

3,159

(20.4)

Levi Strauss

279

(8.7)

1,002

(31.1)

1,866

(57.8)

188

(5.8)

588

(18.2)

Lululemon

379

(8.2)

77

(1.7)

143

(3.1)

125

(2.7)

Michael Kors

20

(0.1)

42

(0.3)

573

(3.7)

101

(0.7)

250

(1.6)

154

(1.0)

Ralph Lauren

220

(4.7)

2,865

(61.5)

419

(9.0)

865

(18.6)

931

(20.0)

Under Armour

370

(19.5)

886

(46.6)

48

(2.5)

486

(25.6)

115

(6.1)

Benetton

21

(0.3)

142

(2.1)

130

(9.7)

264

(3.9)

239

(3.6)

101

(1.5)

Burberry

778

(16.4) 1824 410

Hugo Boss

1,086

(42.8)

563

(15.1)

1,361

(53.6)

452

(17.

8)

588

(23.2)

Mango

664

(49.6)

504

(37.6)

Next

1785

(21.3)

1,102

(23.3)

871

(18.4)

Esprit

66

(16.0)

1,075

(28.9)

354

(9.5)

486

(13.1)

Zara

15

(3.7)

1

(0.4)

9

(2.1)

Summary statistics (of the above)

Costs, Million $:

Average 193 491 664 1,343 306 525 699

S.D.s* 223.05 411.20 693.17 1,165.72

362.

82 416.91 967.73

Costs, % sales:

Average 3.1 14.0 13.1 31.2 6.0 18.2 10.8

S.D.s 3.16 15.11 7.40 21.06 5.17 10.42 8.07

IQ Capital database

*We use the S.D.s, the method for the calculation of standard deviation of a sample of the population.

Empty cells = n.a.

49

Based on the cost analyses above, we calculate value creation by Bangladesh’s manufacturers and

the lead firms. Value creation is commonly measured by value added, defined as the difference

between the value that customers are willing to pay for the finished goods and the cost of purchased

goods and services. Subject to data availability, we calculate value added by Bangladesh’s

manufacturers as the difference between their total sales and the cost of purchases (Table 9a). The

entire sales of Bangladesh manufacturers are generated through export (all their production is

exported) and, therefore, we use export figures to calculate value added.

Table 9. Value Creation in the Garment Industry, Million US$

Table 9a. Bangladesh’s Manufacturers, Value Added per Establishment

Mil. US$ % Sales

(exports)

2011-12

1.191

0.062

2012-13

1.379

0.064

2013-14

3.011

0.123

2014-15

2.358

0.092

4-year average

1.985

0.085 Own calculations

Value added by lead firms (see Table 9b) is calculated based on the format for value added

statements used in Integrated Reports that is:

(Sales of goods + Income from services) – (Cost of material + Cost of service)

Although the value added concept originated in the US, the inclusion of value added statements in

financial reports is more common in Europe, and particularly in the UK and its former colonies.

In 1975, the UK Accounting Standard Steering Committee advanced a formal recommendation

for British firms to present value added statements, in addition to the traditional profit and loss

accounts, as part of the attempts to present the financial value of sustainability programs (Riahi-

Belkaoui 1999).

50

Table 9b. Value Added by Lead Firms. 5 Year Average, 2011-2015

Mil US$ % Sales

American Eagle 1,236.36 0.38

Coach 1,919.34 0.57

GAP 3,818.74 0.81

Levi Strauss 2,473.40 0.66

Lululemon -1,178.25 (2.88)

Michael Kors 6,534.65 0.42

Ralph Lauren -5,102.48 (1.97)

Under Armour 3,079.45 0.81

Benetton 2,432.32 0.52

Burberry 717.30 0.55

Hugo Boss 1,409.43 0.63

Mango 942.58 0.50

Next 4,662.31 0.56

Esprit 3,880.60 0.58

Zara 1,235.87 0.49

Average 5,998.19 0.51

S.D.s 284.59 0.79 IQ Capital database

3.2 Value Appropriation

Value appropriation is commonly measured in this area of research by profits. Below we use the

best and latest available data at the time of collection to present the profits of Bangladesh’s

manufacturers and lead firms.

Manufacturers

As noted earlier, Bangladesh’s garment manufacturers are privately owned and are not required to

disclose accounting information. Thus, their profits are not known. We rely on available industry-

level data to estimate average profits per establishment. Total garment exports per establishment

are employed as measures of sales. Average cost per establishment were taken from Table 6 above.

Based on these data, we calculate average profits and profit margins per establishment (Table 10).

51

Table 10. Value Appropriation in the Garment Supply Chain. Profit Measures

10a. Bangladesh’s Manufacturers. Average per Establishment

Net profits before

tax

Mil. US$

Net profits after

tax18

Mil. US$

Profit margins

% sales

2011-12 0.391 0.352 9.90

2012-13 0.374 0.336 9.20

2013-14 1.312 1.181 20.35

2014-15 0.414 0.269 4.54

4-year average 0.623 0.534 11.06

Memorandum items: Average annual exchange rates19. Taka/US$ Taka/EURO

2011-12 75 103

2012-13 81 106

2013-14 77 104

2014-15 80 96

Own calculations based on data in Figure 9 and Table 7

18 Corporate tax rates for Bangladesh garment manufacturers were 10% for the 2011-12 through 2013-14 FYs, and

35% for 2014-15 FY (Mirdha 2016). 19 With all the revenues and large part of the costs denominated in foreign currencies (mostly the $ and euro), the

exposure of Bangladesh’s manufacturers to unfavorable movement of the taka relative to foreign currencies is

moderate. The components of their business that take place in taka and expose them to exchange rate risks are local

purchases, primarily of textile, accessories and other miscellaneous, wages, taxes, and overhead costs. In the last ten

years, the taka depreciated in relation to the dollar by about 20%, and while it has been fluctuating considerably in

relation to the euro, by 2016 its value is on par with its value ten years ago.

52

Lead Firms

In Table 10b we present profit measures of lead firms, globally and in the US.

10b. Profit Measures of Lead Firms

Operating Profits

before tax*

Mil. US$

Net Profits after

tax20

Mil. US$

Profit Margins

% sales

World’s largest apparel companies (by brand value), 5-year average (2011-2015)

American Eagle 260.06 137.55 4.80

Coach 1,215.90 827.56 21.18

GAP 1,916 1,142 8.21

Levi Strauss 422.46 163.68 2.89

Lululemon 322.23 219.43 17.12

Michael Kors 505.70 432.00 9.02

Ralph Lauren 1,042.42 695.32 10.03

Tommy

Hilfiger

6.97

Under Armour 279.81 165.73 6.58

Benetton** 102.92 3.60

Burberry 615.80 427.69 13.88

Hugo Boss 393.34 10.75

Mango 119.15 16.2

Next 1,107.74 782.78 12.16

Esprit -27.87 -171.68 0.23

H&M 3,203.18 2,487.29 14.40

Uniqlo 1,347.60 857.43 6.62

Zara 10.04

Summary statistics (of the above)

Average 767.50 577.59 9.70

S.D.s 856.45 950.95 5.44

Top 50 publicly-traded most profitable US apparel companies with at least $100mil.

annual sales in 2015

Average 5.20

S.D. 3.34

Median 4.90 IQ Capital database, Apparel Magazine 2016 *The desired measure is net profits before tax but these data are available for only a few companies.

** Data for Benetton are 2011 only.

20 The vast differences between the before/after tax profits are indicative of the high tax rates to which lead firms are

subject. Appendix 6 shows the effective tax rates paid by them, ranging from about 25% and up to 40% and in one

case 50%. The largest global apparel companies are incorporated in countries with high corporate tax rates. Japan and

the US, two major home countries of these companies, are ranked respectively as the number one and number two

highest corporate tax rate countries in the world. Corporate taxes have gone down in many European countries in

recent years but are still high by international standards. Net profit after taxes represents the balance between total

revenues and all operating expenses, interest, depreciation, taxes and preferred stock dividends.

53

Acknowledging the limitations of the data and the suggestive nature of the conclusions we can

draw based on them, the marginal profitability of lead firms is below the estimated averages for

Bangladesh’s manufacturers.

The comparability between the profits of lead firms and Bangladesh’s manufacturers is tempered

by differences in the populations studied. Data for the lead firms refer to the world’s largest and

most valued apparel companies (the upper part of Table 11) and the most profitable such

companies in the US (the bottom of Table 11). These companies are likely to exhibit above-

industry average performance and probably skew the figures upwards. To the best of our

knowledge industry averages, globally, in the US or elsewhere, are not available. The data for

Bangladesh’s manufacturers, in contrast, represent the averages for the entire populations, and as

such, cover the whole performance spectrum.

It should also be noted that most of the lead firms studied outsource from Bangladesh (Appendix

1), such that the lead firms and the manufacturers are de facto participants in the same value chain

and create and appropriate value in collaboration. This makes the comparisons between them

meaningful.

At the same time, however, the nature of their participation in this supply chain varies, and this

may hamper the comparability of their profits as an indicator of value appropriation. The profits

of Bangladesh’s manufacturers are generated entirely through their participation in the

Bangladesh-cantered segment of the global garment supply chain. The profits of the lead firms, in

contrast, are the aggregated values across their activities worldwide. The share of profits that can

be attributed specifically to their activities in Bangladesh is not known (and probably cannot be

calculated meaningfully). Even H&M, the largest buyer in Bangladesh, outsources production

from 700 suppliers worldwide, only a third of which are in Bangladesh (Hoffman 2014). The

shares of purchases generated in Bangladesh of other major buyers are smaller.

With these reservations in mind, the analyses reported in Tables 10 and 11 do not lend support to

claims about unfair and unjust value distribution among the two major participants in the garment

global supply chain—Bangladesh manufacturers and global brands—that motivated this research.

If anything, Bangladesh manufactures appear to appropriate value in excess of the value they

create. We do no find support for the often claimed misappropriation of value by global brands.

We suggest two somewhat related differences between Bangladesh’s manufacturers and global

brands pertaining to levels of transparency and exposure to stakeholder pressure that explain this

finding. By virtue of differences in ownership and legal requirements in their respective countries,

the activities of the brands, in Bangladesh and elsewhere, are documented with great detail and

publicly available. Only a handful of Bangladesh manufacturers are publicly-traded on the Dhaka

and Chittagong Stock Exchanges21. A majority of these companies are incorporated as Privately

Limited Companies under the Companies Act of Bangladesh and are privately owned, mostly by

the founder or his family. The incorporating authority in Bangladesh is the Registrar for Joint Stock

Companies & Firms22. Although required to submit audited accounts to the National Board of

21 http://www.dsebd.org/company%20listing.php http://www.cse.com.bd/company_by_alphabet.php 22 http://www.roc.gov.bd/

54

Revenue and tax returns, Bangladesh’s manufacturers are subject to minimal requirements to share

information publicly about their activities23.

These varying levels of transparency, coupled with different ethical norms regarding labour rights

and value distribution of local stakeholders, expose the brands to strong societal pressure to

conduct their business while adhering to the highest moral standards, even when doing so is

inconsistent with financial considerations. Failure to meet these expectations is punished heavily

by stakeholders, creating huge reputational risk and acting as effective market mechanisms to

correct for any deviations from societal expectations to create value in a fair and sustained manner.

No equivalent mechanisms exist in relation to the manufacturers, creating the imbalance we

observe between value creation and appropriation in this part of the supply chain. Lack of

transparency shields the manufacturers from accountability and challenges the ability to observe

market distortions and correct for them. This situation calls for policy intervention, notably in the

form of increased minimum wage, particularly to unskilled labour, to correct for this distortion. It

also calls for a different appreciation of the limitation of our data and analysis. As this discussion

reveals, a lack of transparency by the manufacturers is at the root of the problem we are trying to

explore, but at the same time it also challenges the ability to study it and uncover the reality of

their activities, calling for greater tolerance for the limitations of our data.

To gain additional insight into the relationships between value creation and value appropriation

we conducted a series of case studies with selected garment manufacturers and brands that appear

to appropriate greater value from their participation in the garment supply chain. We sought to

examine the reasons for this outcome and the extent to which their high value appropriation is

related to their value creation activities.

Variations in Value Appropriation

Case Studies: Successful Garment Producers of Bangladesh

The RMG industry in Bangladesh has been established for almost four decades. By now a good

number of highly successful firms exist, with stable market access and business relations.

Entrepreneurs of three such firms were interviewed to gain an understanding of the factors behind

their success. To consider an enterprise successful, the study team requested BGMEA to identify

some manufacturers whom they consider to be successful in this business and who were in

operation at least before the abolition of the Multi Fibre Agreement (MFA) quota in 2005.24 The

successful manufacturers were then interviewed25 with a checklist to reveal how they sustained in

the business by overcoming various obstacles and grew over time. A summary of the findings is

presented in Table 11. Details on the case study firms are provided in Appendix 7.

23 The only firm-level data that are systematically collected about Bangladesh’s manufacturers that we are aware of

are export data. 24 2005 was a crucial period when the RMG manufacturers in Bangladesh had to change many issues related to their

businesses as the quota granted to Bangladesh’s RMG under the Multi Fibre Arrangement was abolished according

to the WTO rules. 25 Mainly the owners were interviewed, while data were supplied by senior officials in the respective firms.

55

Table 11. Profile of the Case Study Firms: Successful Garment Manufacturers in Bangladesh

Name of the firm Tusuka Garments limited Pacific Jeans Limited Misami Garments

Limited

Establishment year 1997 1984 1984

Employment,

2016

14,000 22,000 11,616

Employment 2007 4250

Production volume

(annual average,

recent years,

number of pieces)

22 million sewing and

washing of denim jeans

30 million denim jeans 24 million denim and

non-denim,

6 million outerwear

Type of operations

when started

business

Started as a buying house

named "Texel", focusing

only the woven market

Denim jeans producer Denim jeans producer

Types of

operations

currently

performed

Production and washing of

denim jeans

Production and

washing of denim jeans

Both production and

washing26 of denim and

non-denim bottoms in

three wholly owned

factories

Factors behind the

success (according

to the founder)

Better technical know-how

of management personnel

in the production process;

product and market

specialization; quality and

commitment; compliant

working condition;

investment in research and

development and efficient

marketing team

Investment in

developing new

processes (including

upgrading of

technology); own

sample development/

collection capability;

excellence in quality

assurance and

maintaining appropriate

working standard

facility; investment in

quality development of

the mid-management

level

Risk-taking capability;

quality of products;

sound organization

structure and investment

in technology

Setting of prices Price taker for regular

items; price setter for high

value-adding items

Price taker for regular

items; price setter for

high value-adding

items

Price is mainly

determined by the

buyers

Issues of concerns

for future

sustainability

Market fluctuations like

currency exchange rate,

wage increases, etc.

Instability in price,

currency fluctuations in

destination market

26 Washing is an important part of denim jeans production. At this stage, the look of the jeans are adjusted according

to the demand of customers (e.g., whether jeans are faded or not, the appearance of the color, whether or not to have

creases on the jeans, the softness of the jeans etc.)

56

From the discussion with case study manufacturers, the following lessons were learnt.

Investment in quality of personnel is a key factor for success:

These firms have invested in the skill improvement of the people working with them. This includes

efforts to increase efficiency of mid-level management, developing efficient management structure

for the whole enterprise, increasing the technical skill of the management personnel in the

production process and so on. These firms appear to have adopted this notion quite early. As a

result, they not only could assure better quality production but fewer turnovers of employees.

Investment in new technology helped increase productivity:

All the case study manufacturers expressed that they continuously invest in new technology. This

has helped them to improve efficiency and product quality as well as create variety in their

products.

Investment in research and creativity is widespread:

The case study manufacturers have invested in research on the markets of their products, the trends

in design and so forth. They have attracted talented people for market research and design

innovation.

Maintaining quality of product is a key factor:

The case study manufacturers place high importance on the quality of the product. To ensure the

quality, some of them rely not only on high-tech machines but also on dedicated quality teams for

individual buyers/brand.

Bangladesh’s RMG has reached a level where some firms are price-setters, not price-takers:

It is noted that two of the three case study manufacturers have reached the level of price setters, at

least for some products, despite the usual notion that Bangladesh produces low-end products and

is a price taker. According to Pacific Jeans, their investment in design development has played a

big role in establishing their strength as a price setter. “Pacific Jeans Innovation Centre” is

continuously experimenting on innovative fits, finishes, fabrics and design development in denim.

Their collaboration with highly regarded designers from US, EU and Japanese brands has

contributed in a special way to establish them not only as a world-class manufacturer but also as a

supreme denim and casual design solution company.

Business relationships with buyers and retailers resemble partnerships:

For most of the products, these manufacturers deal directly with the retailers or large buyers. As

they have been in business for a long time, they have developed a close relationship with many

buyers and retailers. This relationship is considered by them as a partnership in business due to

establishing long-run trust and dependency. This trust also reduces the risk of losing buyers in

difficult times like that following the Rana Plaza disaster.

Factory compliance is a precondition for success:

A good working environment and positive relationships with workers are considered preconditions

of success for these manufacturers. According to them, factory compliance plays a crucial role in

attracting and retaining experienced workers. The case study manufacturers pay salaries to the

workers on time; they provide the workers with holidays according to labour law and also facilities

57

like day-care services for children of workers or medical care for workers. Regular payment of

salary and bonuses as well as the availability of various benefits improve relationships with

management and workers.

Case Study: A Successful Global Brand–H&M

The Choice of H&M

H&M is the world’s second largest company by brand value, after Zara (see Table 7). As other

leading fashion companies struggle, these two companies have reported double-digit sales growth.

In comparison, GAP shares have declined by 50% over the past year; Michael Kors’ net income

fell by 16% in 2016/5, and Ralph Lauren reported a $22 million loss in the first months of 2016

(Kapner 2016).

The vertically integrated business model of Zara excludes it as a candidate for this analysis. H&M,

in contrast, outsources its entire production and keeps in-house only the higher value added

activities—including design, brand building and retail—making it an interesting case for the study

of value creation and appropriation in the garment supply chain.

As noted above, in 2016 H&M was ranked number five in the Gartner global ranking of 25 firms

selected globally across industries based on their supply chain management, up from number seven

in 2015, and ahead of Zara at number six. The ranking is based on a combined measure of

economic performance (i.e., return on assets and revenue growth), as well as CSR and

sustainability measures. H&M and Zara are the only apparel companies to be included in the 2016

list.

H&M in Bangladesh

H&M is also suitable for our study because of the magnitude of its activities in Bangladesh. It has

been outsourcing from Bangladesh for more than three decades, and it is currently Bangladesh’s

biggest buyer, and has announced plans to further increase the scope of its activities in Bangladesh

(Donaldson 2016d). Bangladesh is one of H&M's most important production markets as 255 of its

700 suppliers worldwide are from Bangladesh (Hoffman 2014).

H&M is also strongly committed to sustainability of its supply chain—globally and in

Bangladesh27. It views itself as a leader in sustainability and takes pride in its heavy investment in

this area. As documented in H&M 2012 Sustainability Report, H&M sustainability record in

Bangladesh stood out even before the Rana Plaza collapse, and it advocated higher minimum

wages, regular wage adjustments and fire safety in the garment factories in Bangladesh. It also

offered fire safety training for three million employees in Bangladeshi factories. In the aftermath

of the Rana Plaza collapse, H&M was the first signatory to the Accord on Fire and Building Safety

in Bangladesh and has been active and influential in instilling change in labour conditions and

safety standards in Bangladesh’s garment factories. It thus serves as a good illustration of our

conceptualization of value creation as encompassing, in addition to economic activities, also social

and governance issues.

27 This commitment is thoroughly documented in H&M’s annual Sustainability Reports

http://sustainability.hm.com/en/sustainability.html#cm-menu

58

H&M’s impressive growth and performance suggests that it appropriates considerable value from

its global supply chain. The supply chain is at the centre of H&M’s low-cost, fast-fashion business

model and is essential for H&M’s ability to meet these goals. Indeed, H&M is opening 425 new

stores around the world in 2016, after opening 413 new stores in 2015 (Donaldson 2016f).

Appendix 1 shows that during 2011-2015 it was the fastest growing company among the world’s

largest apparel companies.

The case studies support our contention that value appropriation is determined by value creation

and cannot be discussed in isolation from value creation. The firms studied have developed firm-

specific means to create more value, which in turn has led to greater value appropriation compared

to other participants in their subgroups.

Caveats and Limitations

The findings and the conclusions we draw based on them should be interpreted in consideration of

caveats of the method and analyses. Notable among these are the limitations of the data. Although

we relied on the most comprehensive and detailed data available, these may not always allow

observing the relationships of interest at the level of detail and vigour desired. These limitations

are most notable in relation to the data on Bangladesh’s garment manufacturers, which, as noted

above, are subject to minimal formal requirements of data collection and publicity. Given the

scarcity of firm-level data, we used the totals to calculate averages per establishment and based

the analyses on these figures. Averages naturally hide variations across establishments.

While data are far richer for the global brands, they are not always publicly available in a format

needed for our study. The data available are aggregates across items and geographies, and as such,

do not enable study of relationships between value creation and appropriation at the adequate level,

that is, of an individual product. Data are also limited for brands that are part of other corporations

(Appendix 1), where data might be available only for the corporation as a whole28.

Data availability has also imposed constraints on the methods of calculating value creation and

value appropriation and their comparability across different participants, which is fundamental for

our study.

Furthermore, subject to data availability, we employed revenues to calculate value creation and

value appropriation. While commonly used in academic research in this area, revenues are affected

by market forces that set up market prices, such as competitive pressure and bargaining power

between sellers and buyers. The export value of Bangladeshi manufacturers captures not only the

value they create but also their negotiating power vis-à-vis the brands. Sales of the brands are

similarly affected by the competitive intensity in the market for the final goods, and other factors

that affect demand (e.g., weather conditions), as well as the cost of production, for instance the

impact of the end of the Fibre Quota in 2005. Our interest is in the balance between value creation

and value appropriation, which minimizes this potential bias because revenues are used in the

measures of both value creation and value appropriation. Furthermore, the same method is

28 Primark, owned by Associated British Foods, was excluded from the study on this ground.

59

employed in relation to both global brands and the manufacturers, so to the extent that there is a

bias, it affects both of them. Since our interest is in the comparison between manufacturers and

global brands, the bias is likely to be minimal.

In addition, as is common in research in this area, we employed profits as indicators of value

appropriation. Profits can be manipulated in a variety of ways. For instance, high wages for top

management and leading designers of global brands reduce profits and lower value appropriation.

Another limitation of profits as a measure of value appropriation is that they represent only one

dimension of value and may not necessarily be the most important one for all the stakeholders

involved in the supply chain. Value created by supply chains is broader than what performance

indicators alone could capture (UNIDO 2015). The profit measure could also be biased as a result

of trade-offs firms make between profitability and growth. Competitive pressures may incentivize

firms along the supply chain to reduce prices as a way of differentiating themselves.

Yet another concern is that our measurement method entails that value creation and appropriation

of different participants in the value chain are interdependent on each other—violating a major

requirement of the analysis we seek to conduct. Thus, when the global brands pay less to

manufacturers, it appears as if their value creation (revenues) is diminished, whereas the value

appropriation by the global brands increases (i.e., lower pay reduces cost of purchases and

positively affect profits).

Moreover, some of the most important elements of value creation and value appropriation are

difficult to measure and express in the economically meaningful terms needed for the analyses.

The challenge is further exacerbated because often these difficult-to-measure elements are the

most essential parts of what is being measured. Examples include brand value, social costs,

opportunity cost, and the like.

Lastly, the impact of exchange rates may bias the comparability of the results—among lead firms,

between them and Bangladesh manufacturers, and over time. The analyses were conducted in US

dollars but eight of the 20 lead firms studied report financial data in non-dollar currencies,

including the euro, Japanese yen, Swedish krona, Jordanian dinar, and Hong Kong dollar

(Appendix 1). The dollar fluctuated at different rates in relation to these currencies during the

period studied. As noted above, the currency exposure of Bangladesh’s garment manufacturers is

mostly to the dollar and euro, and their costs and income are affected by the fluctuations of these

currencies in relation to Bangladesh taka.

Considering these caveats, our findings and conclusions should be taken as suggestive and

indicative rather than as formal evidence. Notwithstanding these limitations, however, we believe

that the study makes a most important contribution in elucidating the sources of value creation and

value appropriation in the global garment industry, and deepening the understanding of the

relationships between them.

60

3.3 Industrial Variations and Value Appropriation by Consumers—Consumer Surplus

The balance we document in the garment industry between value creation and value appropriation

differs considerably from what has been observed in other global supply chains (Table 12).

Notwithstanding differences in methods of analyses that may derail the vigour of the comparison,

lead firms in the supply chains presented in Table 12 appropriate far greater shares of value than

the other participants, and in some cases, bigger than that of all of them combined

Table 12. Value Appropriation in Global Supply Chains, Selected Industries

Industry/Product

Value Appropriation

(Profit margins)

Source(s)

iPod Apple 40%

Distributors 10%, Retailers 15%

Dedrick et al. 2009

Notebook PC HP 28%

Microsoft and Intel 18%

Taiwan, Korea, Japan suppliers combined

10%

Dedrick et al. 2009

V3-RAZR

Mobile phone

Motorola 50%;

all suppliers combined 22%

Dedrick et al. 2011

iPhone Apple 58%

Korea, Japan, Taiwan, EU suppliers combined

6.6%

Foxconn <3%

Kraemer et al. 2011

95N smartphone Nokia 50%

All suppliers combined 11%

Ali-Yrkko et al. 2011

iPad Apple 30%

Korea, Japan, Taiwan suppliers combined

10%

Kraemer et al. 2011

Food Kraft 10%, Nestle 9%

Olam (world’s largest supplier of food

ingredients) 2%

Own calculations based

on company reports,

2015

Diamonds Pre-tax profits of retailers > all other

participants combined (rough diamonds

producers, brokers, dealers, jewellery

manufacturers, wholesalers)

Spar 2002; The Mining

Journal 2006

Sport shoes Retailers 33%, Brands 22%

Manufacturers 12%

Gerard 2011; Kish 2014

Theory suggests that in the absence of market failures that distort the dynamics of competition,

value appropriation is determined by value creation. The dual levels of competition taking place

within supply chains—among subgroups specializing in different parts of the chain, and within

these groups among firms with similar specializations—impose this outcome. If the two are not

aligned, buyers will turn to other competing alternatives. Value creation thus becomes the upper

bound on the amount of value a player can appropriate (Brandenburger and Stuart 1996; Chatain

2010; Chatain and Zemsky 2011).

61

Research that seeks explanation for the variations in value appropriation common in supply chains

indeed attributes them to various types of market failures, originating in industry structure and

firms’ market power. Industrial organization-based explanations advance the argument that

distortions related to market structure and their competitive dynamics imply that firms competing

in less competitive markets appropriate more value than those in competitive markets (Porter

1980). Explanations based on the resource-based view (RBV) of firms pose that market failure

that introduce variations in firms’ capabilities and their rarity in the market afford some firms

stronger negotiating power, and enables them to claim larger shares of value (Adegbesan 2009;

Adegbesan and Higgins 2011).

Both types of market failure exist in the garment supply chain, as has been documented extensively

in the previous discussions, but as our findings suggest, the outcome in terms of value

appropriation across the participants is different. We propose explanations for the distinctiveness

of the garment industry related to two features of this supply chain that constrain the ability of lead

firms to appropriate value. These are related to competitive pressures in the market for the final

goods that erode the revenues of lead firms, and to the large investments undertaken by lead firms

in social value and governance of the supply chain that increase their costs. We also suggest that

government support for Bangladesh’s garment manufacturers had been instrumental in narrowing

the performance gap between them and the lead firms.

Global prices of apparel have been declining continuously for decades. Analysis by EuroMonitor

International shows that the average global apparel unit price declined from $18 in 2005 to $12 in

201529. DynamicAction’s Retail Index, an index that benchmarks retail trends in key categories

based on more than $5 billion in consumer transactions, shows an increase of more than 60% in

discounted apparel items in 2015 alone, indicating the growing pressure on price.

Figures 7a and 7b show changes in the consumer price index of apparel relative to all items in the

US and the EU. In both economies, the apparel price index has remained constant during the

periods analysed while the price indices of all items have risen continuously. Appendices 8a and

8b present data that show continuous decline in consumer expenditure on apparel in the total

consumption basket in the US and the EU. These trends have reduced the revenues of lead firms

and diminished their profits.

29 In addition to competitive pressure, price reduction has also probably been influenced by the termination of the

Fibre Quota in 2005 that reduced the cost of production.

62

Figure 7. Consumer Price Index: Apparel versus the Economy as a Whole

7a. US

Note: Shaded areas indicate US recessions. US Bureau of Labor Statistics. https://fred.stlouisfed.org/categories/32417

7b. EU

https://alfred.stlouisfed.org/series?seid=CP0310EU28M086NEST

Research in the resource-based view of the firm offers theoretical underpinning to the suggestion

that the brands do not appropriate disproportionate shares of value in relation to their value

creation. This research shows that rent does not always leads to superior performance for the firm

that generated it, and instead might be appropriated by different stakeholders in the firm.

Conceptualizing the firm as a nexus of contracts, this theory suggests that value appropriation is

based on the negotiation between the firm and its stakeholders over the rent created, with the

outcome being determined by the relative negotiating power of the firm vis-à-vis its stakeholders.

It identifies the sources of bargaining power of various stakeholders as originating in the

knowledge specificity of the stakeholders concerned, its rarity in the market, and market conditions

that determine the demand for it (Adegbesan 2009; Adegbesan and Higgins 2011). These ideas

have been advanced in relation to various stakeholders in the firm and are most developed with

employees, whose knowledge and expertise afford them strong negotiating power vis-à-vis the

63

firm, making them a major claimant of rent. Other stakeholders discussed include top management

and shareholders (Coff 1999; Molly and Barney 2015).

We extend this rationale to the garment supply chain and suggest that the strong competition in

this market affords consumers strong bargaining power and the ability to pressure prices, making

them a major claimant of the value surplus created by the supply chain. While knowledge was

described by extant research as the source of stakeholder negotiating power, we suggest that in

relation to consumers, the intensity of the competition and the ability to put pressure on prices by

‘voting with their feet’ are the sources of power for claims over firms’ rent.

Negotiation and bargaining power theories pose that bargaining power is determined by four

features: 1. Stakeholders’ ability to act in a unified manner, such that they can pose serious and

credible threat of exit, i.e., departure to a competitor; 2. Parties’ access to information and their

ability to reduce or eliminate information asymmetries; 3. The replacement cost to the firm if a

stakeholder exits and the loss that would be incurred to replace her; and 4. Stakeholders’ switching

costs, as they affect the cost of exit (Marburger 1994; Lippman and Rumelt 2003; Ahern 2012;

Krasteva and Yildirim 2012).

The low (none existing) switching costs, and the simplicity of the information on which their

product evaluation and choice are based—mostly prices and quality, which are easily accessible

and directly assessed—affords apparel consumers strong bargaining power30. The advent of the

Internet and social media has considerably increased consumers bargaining power as it has further

reduced switching costs and access to information. Social media creates forums for consumers to

pose a collective threat of exit if their demands are not met. These features of the negotiating

process have turned the final consumers, rather than the lead firm, into major claimants over the

value created by the supply chain, and reduced the revenues of lead firms, thus harming their

profitability.

The second reason we offer for the balanced distribution of value among the various participants

in the garment supply chain is related to the centrality of social value creation in value creation

and the strong commitment that lead firms have exhibited to the sustainability of the supply chain.

Discussions of causes of market behaviour seldom incorporate issues related to social value

creation as possible causes of market failures.

The distinctiveness of garment in this respect appears to originate in the low-level skills involved

in garment production and the vast differences in the levels of economic development of the

various participants. This reality exposes lead firms into collaborative relationships with firms

from countries at a lower level of economic development than those observed in most other supply

chains (e.g., electronics, cars), and puts strong pressure on governance and sustainability (Gereffi

1999; Fernandez-Stark, Frederick and Gereffi 2011; Maximilian 2013; Hoque 2013; Elm and Low

2013). Anecdotal observations suggest that the commitment of global brands to these causes

exceeds what is common in most other industries, particularly in the context we study: Bangladesh

in the aftermath of the Rana Plaza collapse.

30 A comparison of garment with intangible goods explicates this point. In the latter, judgment of the quality of what

is being purchased and evaluation of its worthiness are challenging and often cannot be determined with certainty

prior to the actual purchase.

64

While the precise magnitude of the costs of governance are not known as firms are not required to

report these costs separately from general and administrative costs and seldom do so, anecdotal

observations suggest that the commitment of global brands for social causes has increased

considerably the overall cost of managing their supply chains. For instance, estimates suggest that

in 2015, two years after the Rana Plaza tragedy, the combined costs of voluntary actions embraced

by global brands such as H&M, Zara’s parent Inditex, Levi Strauss, and Primark, among others,

have exceeded $5 billion.

Individual companies have also taken their own initiatives. H&M’s commitment to governance

practices in its supply chain is noted above. As part of its Fair Wage method, it has recently

enhanced the compensation package to Bangladeshi manufacturers to help them upgrade safety

conditions in their factories (Donaldson 2016d). In a similar fashion, Levi Strauss, in collaboration

with the World Bank IFC, introduced financial incentives to its 550 suppliers around the world to

meet environmental, labour and safety standards, by offering low cost financing to the best

performers on these measures (Donnan 2014).

In embracing these actions, global brands are often subject to strong public pressure by

stakeholders who are not willing to pay the price for them. Research shows that, although

consumers claim in repeated surveys to the contrary, they do not endorse such activities in their

purchasing behaviour and are not willing to pay premium for products and services that adhere to

high social standards. Green products account for less than 4% of the global market in spite of

decades of investment in marketing such products. Nor do employees show an inclination to accept

lower salaries from socially engaged firms. And a minority of investors rewards firms’ shares for

social activities that do not improve financial performance (Bagnoli and Watts 2003; Vogel 2006;

Besley and Ghatak 2007; Olson 2013). Such stakeholders’ reactions turn the global brands into

the ultimate bearer of the cost of management of supply chain and reduce their profits.

Lastly, Bangladesh’s government has actively supported the garment manufacturers since the

inception of the industry in the late 1970s and has played a major role in enhancing their

performance. The details of the support have slightly changed over time but have included

manufacturer benefits such as duty-free import of capital machineries for 100% export-oriented

RMG factories and duty-free raw material imports that are used for the production of exports. In

1980, Bangladesh Bank granted garment manufacturers back-to-back letter of credits, effectively

reducing interest rates on export credits, which enabled them to import intermediaries without

paying for them at the time of purchase. They also gained access to bonded warehouse facilities

for duty-free imports of input for production, reducing their capital requirements. Other benefits

have included the elimination of taxes on utilities and electricity; reduction in insurance premiums;

and the exemption of value-added taxes on gas, water and electricity bills (Choudhury and Hussain

2005; Yunus and Yamagata 2012). Bangladesh’s garment manufacturers have also enjoyed

exemption from corporate tax on export profits, the manufacturers’ sole source of profits. Between

2005-6 and 2013-14, manufacturers benefited from a reduced corporate tax rate of 10%. The

provision expired in 2014, and the sector paid tax at the 35% rate in fiscal 2014-15. The tax rate

was reduced to 20% in 2015-16 to help exporters upgrade their factories and meet the stringent

labour safety requirements following the Rana Plaza collapse (Star Business Report 2016; Mirdha

65

2016). These compare favourably to the tax and duty levels confronted by the global brands (see

Appendices 3 and 6) and have reduced the performance gap among them.

3.4 Widening Gaps Between Productivity and Wages

Garment production is labour-intensive, with the labour force made up of mostly low-skilled

workers, whose limited negotiating power makes them prone to possible violations of labour rights

and standards. To provide ground for the examination of the extent to which labour in

Bangladesh’s garment industry is compensated properly, we extend our theoretical framework to

the study of the relationships between value creation and value appropriation of labour in

Bangladesh’s garment industry.

Pay levels in the garment industry in Bangladesh have been regulated by the Minimum Wage

Board of Bangladesh, a government statutory agency established in 1959 with the mandate of

overseeing wage levels in the country and ensuring minimum wage levels. It is the only statutory

wage-fixing agency in Bangladesh.

Minimum wages are set by the Board independently for each of the 46 formal sectors of the

economy and are used to ensure that pay levels do not fall below this level. The labour law

mandates revision of the minimum wage at least once every five years, but actual revisions have

not followed this law and vary across sectors. The Wage Board publicizes minimum wage

revisions via its Gazette publications. Although minimum wages are set for all skill levels, they

are particularly important in relation to low-skilled labour whose negotiating power with

employers is weak and subject to various sources of market failures, such as information

asymmetries and power asymmetries between the negotiating parties.

Minimum wage in the garment sector is based on a seven-grade skill scale, and is set up separately

for each grade (Table 13a)31. Minimum wage for garment workers was introduced in 1994 and

went through several revisions since then. In Table 13a, we present the minimum wage levels for

the seven grades as set up by the wage board during the entire period since it was introduced in

1994 and revised in 2006, 2010 and 2013.

The last column of the table presents the employment distribution across the seven grades. This is

based on a survey of 173 factories and 1204 workers conducted in Bangladesh in 2014 (Haque and

Estiaque 2015). We use this employment distribution to calculate the number of employees

working in each grade scale and multiply these respective numbers by the wage level per scale.

The sum of these amounts represents the total wages paid by an average garment factory (Table

13a).

31 The application of the minimum wage regulations to workers who produce sweaters differs from that of other

knitwear workers. Sweater production is administered on a contractual basis, priced by quantity of production rather

than wages. With reference to sweaters workers, the minimum wage implies that pay levels for certain quantities

cannot be lower than the minimum wage for the corresponding grade.

66

Table 13. Wages of Garment Workers in Bangladesh

13a. Statutory Minimum Wage Without Market Adjustments

Grades of

Workers Designation

Gross Minimum Wage Per Month,

Taka32

1994 2006

2010

2013

% total

employment*

VII

Assistant sewing machine

operator,

assistant dry-washing man/woman,

line iron man/woman

930 1662.5 3000 5300 19.8

VI General sewing machine/button

machine operator and others

1320

1851 3322 5678 14.9

V Junior sewing machine operator,

junior cutter, folder (finishing

section) and others

1450 2046 3553 6042 19.3

IV Sewing machine operator, quality

inspector, cutter and others 1710 2250 3861 6420 21.9

III Sample machinist, mechanic,

senior sewing machine operator

and others

2100 2449 4218 6805 19.3

II Mechanic/electrician, cutting

master 3400 3840 7200 10900 1.2

I Pattern master, chief quality

controller 4700 5140 9300 13000 0.1

Number of

employees per

establishment

2,017 1,894.5 1,418.5 1,262.5

Total wages per

establishment,

000

3,196.4 4,038.8 5,302.3 7,878.3

1 US$ = taka 40.01 67.16 69.18 77.75

Employment

weighted minimum

wage per

establishment $

79,890 60,127 76,645 101,328

Minimum Wage Board Gazette, various issues; Haque and Estiaque 2015; Bangladesh Central Bank official annual

exchange rates taka/US$. *Total does not add up to 100% due to rounding errors in the source of the data

32 Gross wages are the base salary, which accounts for about 60% of the total, with the remaining 40% made up of

travel allowance, medical allowance, food allowance and house rent. In addition to wages, employees are also

entitled to two hours overtime, festival bonus, and earned-leave encashment. Most of the factories in Bangladesh

also offer attendance bonus. Other benefits are offered by individual factories on a voluntary basis.

67

The calculations in Table 13a present total wages paid based on the minimum wage levels set up

by the wage board. Actual wages, however, often deviate from the minimum wage. The direction

and magnitude of the deviations are not known, and it is apparent that there is also considerable

variation across factories—depending on size, location, availability of workers in local area and

other such factors—and across pay grades.

The ILO study of actual pay levels in the garment sector in several Asian garment-exporting

countries shows weak compliance with minimum wage standards. More than half the employees

in garment manufacturing in the Philippines and India are paid below the respective countries’

minimum wage. In Indonesia, Thailand and Pakistan, the share of under-paid workers is almost

40%. Bangladesh was excluded from the study due to a poor response rate for the survey and,

hence, similar systematic data are not available, but the weak power of Bangladesh’s garment

workers suggest that a similar situation may prevail in Bangladesh as well. The gap between actual

and minimum wage levels in all the countries studied are higher in relation to women than to men

(60% gender differences in Pakistan), increasing the concern regarding the situation in Bangladesh

where the overwhelming majority of employees in the most unskilled segments that are subject to

the greatest potential violation are women (Cowgill and Huynh 2016).

Industry observers, however, suggest that the common practice in many of Bangladesh factories

is for actual pay levels to be above the minimum wage. Some manufacturers increase wages every

year in the form of annual increment and pay overtime as well as provide a variety of production

bonuses and benefits that are above those required by law, such as attendance or food allowances.

We follow these anecdotal observations and base the adjusted analyses below on estimates of

higher pay levels.

Systematic data on the gap between the minimum wage and actual pay levels do not exist, but

industry analysts estimate that for grade V, VI and VII, the dispersion may be between 5%-10%.

For grade II, III and IV, the dispersion may range between 10%-20%, and in grade I could be

above 50%. The demand for employees in these levels exceeds supply, giving the employees

strong negotiating power. In Table 13b we present a revised calculation, based on these market

adjustment estimates. We repeat the analyses with these revised figures, following the same

method described above, and present total wages in the bottom of the Table.

68

13b. Estimates of Prevailing Wages by Grade (Minimum Wage with Market Adjustments)

Grades of Workers

Prevailing

wages

(above

minimum

wage)

Gross Minimum Wage Per Month, Taka33

1994 2006 2010 2013 % total

employment*

VII 5% 976.5 1662.5 3000 5300 19.8

VI 7.5% 1419 1851 3322 5678 14.9

V 9% 1566 2046 3553 6042 19.3

IV 10% 1881 2250 3861 6420 21.9

III 15% 2415 2449 4218 6805 19.3

II 20% 4080 3840 7200 10900 1.2

I 60% 7520 5140 9300 13000 0.1

Number of employees per establishment

2017 1,894.5 1,418.5 1,262.5

Total wages per establishment, 000

3,578.6 4,491.6 5,897.7 8,503.2

1 US$ = taka

40.01 67.16 69.18 77.75

Employment weighted wages per establishment $

89,442.6 66,869.7 85,252.2 109,365.4

Sources as per Table 13a.

Figure 8 summarizes respectively the changes in wages and productivity since the introduction of

minimum wage in the garment industry.

33 Additional labour rights include two hours overtime, festival bonus, and earned leave encashment. Most of the

factories in Bangladesh also offer attendance bonus. Other benefits are offered by individual factories on a voluntary

basis.

69

Figure 8. Labour Productivity and Wages (with Market Adjustment), % Change (in UD$ terms)

Source: Table 13b

Some caveats of the analyses might be borne in mind when interpreting the findings. For one, we

measure labour productivity by exports per employee, a potentially biased indicator of labour

productivity because as noted earlier, export values are affected by market forces and might also

be influences by changes in the price of purchases (e.g., cotton prices) (OECD 2001). Furthermore,

productivity measures should ideally be based on constant prices, using the double-deflation

method, rather than current prices we use for the lack of better data.

In addition, the estimate of labour distribution across the seven grades is based on a survey

conducted in 2014 and applied across the entire period studied. Data availability does not enable

us to account for changes in the distribution of labour across the grades over time. However, we

believe that the actual bias is minimal because a majority of employment has been concentrated in

the low grades. To the extent that bias exists, it is likely to overestimate pay levels because, if any

change has occurred, level of skills has risen over time.

Further, in the absence of data, the market adjustment analyses (Table 13b) are based on estimates

by industry analysts and can only be taken as indicative and suggestive. Lastly, reservations

expressed earlier regarding the limitations of the average and the variations across the population

hold in relation to these analyses as well.

With these reservations in place, a review of the analyses reveals a large gap between the increase

in labour productivity and wages. Wages decreased in dollar terms between 1994—when

minimum wage was introduced—and the first revision that took place more than a decade later (in

violation of Bangladesh’s labour law that, as noted above, requires revisions at least every five

years), followed by gradual increase since then. This increase, however, does not match the

increase in labour productivity during these periods. The dotted trend lines show continuous

growth of labour productivity during the entire period, climbing to 321% between 1994 and 2015.

The corresponding figure for wages is 22%.

47

36

76

-34

3021

2006/1994 2010/2006 2013/2010

Productivity Wages

70

Figure 9 presents productivity growth at the levels of the factory (establishment) and per employee

during the last three decades. It shows continuous growth during this period. The pay level rises

have not matched the level of productivity growth, and the gap had widened considerably in the

more recent years. As Figure 8 shows, from 2010 to 2013—the last two revisions of the minimum

wage—productivity had grown by 76%, whereas the wage level rose by 20%. This gap is

particularly disturbing given that the productivity growth during this period is due primarily to

improvement in labour skills and efficiency. There has been limited, if any, capital investment in

productivity-enhancing facilities.

Figure 9. Productivity of Bangladesh’s RMG Manufacturers, 1983-2015 (Average export per

employee and establishment)

Own calculation based on data from BGMEA. http://www.bgmea.com.bd/home/pages/tradeinformation

The analyses might be biased by several limitations of the data. The distribution of employment

across the grades is based on a survey of a small number of factories, and its broader validity

beyond this sample to the entire population is unknown. To the best of our knowledge, this is the

best data available regarding this phenomenon. Furthermore, the survey was conducted in 2014,

and the accuracy of the distribution it documents beyond that point in time is now known. There

are reasons to assume, however, that the bias here may not be substantial as employment

distribution tends to become stable over time. Moreover, the gap between the minimum wage and

actual pay levels is now known, and as noted above, varies considerably across factories. This too

may be a constraint on the strength of our findings.

With these reservations in mind, we suggest a gap exists between value creation and value

appropriation in relation to labour employed in garment production. Market forces by themselves

may not correct for this deviation, which calls for policy intervention. We will return to this point

with details in the recommendation section. Below we present a summary of value creation and

value appropriation by the various participants in the garment supply chain.

0

1000

2000

3000

4000

5000

6000

7000

0

1000

2000

3000

4000

5000

6000

7000

19

83

-84

19

84

-85

19

85

-86

19

86

-87

19

87

-88

19

88

-89

19

89

-90

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Employment Productivity, US$ Establishment Productivity ('000 US$)

71

Table 14. Value Creation and Value Appropriation in the Garment Supply Chain

Value Creation

(Value added % revenues)

Value Appropriation

(Profit margins)

Lead firms

5-year average

0.85 9.70

Bangladesh manufacturers

4-year average

0.085 11.06

Bangladesh labour

% Growth, 1994-2015

Labour productivity:

331%

Wages:

22%

72

Chapter 4 Recommendations

The prescriptive analysis above provides ground for normative recommendations to participants

in the garment value chain regarding means to enhance value creation and value appropriation.

The previous discussion suggests that the determinants of value creation and value appropriation

combine factors that are external to firms and not under their control or those controlled by them.

This implies that progress requires joint efforts by firms and the policymakers that command the

environment in which these firms operate.

A major insight of the study is that in the garment supply chain, despite the significant deviation

in value appropriation by labour, value appropriation by both lead firms and manufacturers is

broadly aligned with value creation, shifting the focus of efforts from enhancing value

appropriation to increasing value creation in the first place. We have also demonstrated

considerable variations within subgroups in terms of the ability to appropriate value and suggested

that firms enjoy considerable discretion over the value they appropriate through their participation

in supply chains. The essence of this variation lies in firms’ ability to create more value for their

customers in a firm-specific manner. This gives lead firms considerable power and influence over

the value chains and assigns a responsibility to use their power and influence to improve

governance and sustainability of the value chains. Below we outline the means by which

Bangladesh’s manufacturers can differentiate themselves positively in the eyes of lead firms,

followed by recommendations for policy actions by Bangladesh’s government to assist them in

this task and for the lead firms.

4.1 Recommendations for Bangladesh’s Manufacturers

Governance and Transparency

Lead firms are under strong public pressure for compliance in their supply chains and deviations

from what is expected, which by itself is often not clear, have become hugely punitive and causes

enormous reputational damage (Bishop 2016; Hongjoo and Byoungho 2016)34. This pressure

extends beyond direct suppliers to include also the supply chains of the suppliers, raising the costs

of inspection and supervision confronted by the lead firms. The growth in the numbers of factories

suspended recently by Alliance signatory firms on the ground of failure to adhere to the expected

compliance standards—from 24 by the end of 2015, to 77 in the first quarter of 2016 (Donaldson

2016c)—is indicative of the enormous value that lead firms place on compliance. The Accord is

another independent, legally binding agreement between brands and trade unions designed to work

towards a safe and healthy Bangladeshi ready-made garment industry. Bangladeshi manufacturers,

who are doing business with the brands under Alliance, also need to abide by the requirements of

Accord.

Manufacturers that operate in a transparent manner and maintain proper governance and

compliance in their factories and in their supply chains can assist lead firms in addressing this

concern, which will afford the manufacturers that implement them significant advantage (Kang

and Hustvedt 2014). A recent study of garment manufacturing plants in Sri Lanka shows that

34 As an illustration of the level of scrutiny of activist groups and human right advocates on lead firms, the British

retailer Ivy Park was recently spotlighted for the $126 monthly wages paid in its suppliers’ garment factories in Sri

Lanka, although the minimum monthly wage in the country is $92 (The Sun 2016, McGregor 2016b).

73

voluntary adaptations of high governance standards has a powerful signalling effect and gives the

manufacturers that introduce them significant performance rewards (Jayasinghe 2016).

Speed and Flexibility

Another significant way that manufacturers can gain competitive advantage is speed of delivery.

As noted above, speed has become a critical competitive imperative in the fashion industry, and

lead firms increasingly employ lead time to make up for limitations to predict demand ahead of

production. At the same time, a mismatch grows between the increasing demand for speed and the

swelling complexity of the supply chain, which slows processes down and increases lead time.

This mismatch forces lead firms to use costly buffer inventory and raises the premium on

manufacturers’ lead time and speed of delivery (Ellis 2013).

Surveys of supply chain managers consistently report the high value lead firms place on speed.

Speed was ranked the second highest supply chain priority, lagging only behind ‘reducing overall

costs’, by respondents to a survey conducted by Industrial Development Corporation (IDC) (Ellis

2013). Almost half of the 350 apparel companies surveyed by The Sourcing Journal in 2016 said

they are trying to speed up the flow of merchandise in their supply chain (Donaldson 2016e), and

about 80% of the 300 apparel companies surveyed by Apparel Magazine reported plans to make

sizable improvements in speed to market (Pious and Burns 2015). This survey also finds that the

manufacturers control about one-third of the overall production time (with the remaining two-

thirds split between product design and transportation). This makes the manufacturers’ speed a

significant determinant of overall production time efficiency.

In addition to lead time, flexibility of production, as it enables flexibility for rapid changes in

demand, is also a vital competitive imperative for lead firms and a major selection criterion of

manufacturers. The rapid change of demand creates frequent mismatches between supply and

demand and results in lost business, placing high value on the ability to adjust production rapidly.

Manufacturers that offer the flexibility to change production lines quickly will enjoy considerable

advantage.

State-of-the-Art Technology

A major means by which manufacturers can improve the speed and flexibility of their operation is

the use of technology. Digital technology is transforming the industry and is considered by lead

firms a major means to improve supply chain efficiency (Apparel Magazine 2016). A cross-

industry study of executives in more than 20 countries around the world found that 95% plan to

automate their entire supply chain by 2020, and expect their suppliers to upgrade their IT systems

(Capgemini Consulting and GT Nexus 2016). Policymakers will have to join in in these efforts to

provide the technology infrastructure, without which individual manufacturers cannot improve

their technology.

Garment production is becoming more automated with capital replacing labour (ILO and Asia

Development Bank 2014). Automation was slow to affect the apparel industry because it was cost

prohibitive as compared to human labour in low-cost countries, but as the costs of automation have

come down, more companies will replace human labour with machines. According to one industry

analyst, as soon as 2026, robots will replace labour in garment production (McGregor 2016a; see

also BCG 2015 for similar predictions). Zara already uses robots in its factories in Spain to dye

74

and cut fabrics (Yen, 2016). This underscores an urgent need for technology enhancement and the

acquisition of the skills required to use it. China—until recently ‘the factory of the world’—has

become the world’s largest purchaser of robots, suggesting the likely direction of change in low

cost production and the transformation of manual work that can be automated35.

Cost and Efficiency

Notwithstanding fundamental changes in the competitive dynamics of the industry, cost has

remained the major criterion that determines consumers’ choice, putting pressure on prices in the

market for the final goods and pressing lead firms to lower production costs (Ellis 2013). Rising

labour cost in sourcing countries was cited as the most daunting concern to sourcing strategies

(along with social compliance issues) by a majority of the respondents to an Apparel Magazine

2015 survey (Pious and Burns 2015). Reducing the cost of production is a major source of

differentiation for manufacturers.

Labour costs, which accounts only for about 15% of manufacturers’ total cost, are the major

component of the cost that is controlled by them and, therefore, a major means at their disposal to

reduce overall cost (Anner et al. 2012). However, achieving cost cutting by reducing labour costs

is not desirable because it reduces labour morale and jeopardizes manufacturers’ commitment to

improving compliance practices and, therefore, is not sustainable (Bain 2015). It is also often

associated with higher labour turnover and reduces the ability to attract better quality employees.

A few successful Bangladeshi manufacturers we interviewed for this study attribute their success,

among other things, to high pay levels.

Cost cutting should instead be achieved by improving productivity and efficiency. Better

utilization of labour and machines increases volume of production and reduces the cost per unit.

In a World Bank survey of global buyers, Bangladesh was ranked fifth out of six Asian countries

in terms of buyers’ perception of the productivity of the labour force and the quality of the

production, suggesting a large scope for productivity improvements (Lopez-Acevedo and

Robertson 2016). An older estimate of labour productivity in Bangladesh’s RMG factories places

it well behind China, India and Pakistan (McKinsey 2011).

Learning

The manufacturers’ distinctive position in the supply chain affords them a perspective of the

industry that is different from the one held by lead firms and one they value a great deal. Two

aspects are particularly noteworthy: production expertise and knowledge of multiple brands and

retailers. The ability to utilize this knowledge in ways that benefit lead firms is a critical source of

differentiation.

35 Adidas’ recent decision to open up two robot-based factories in Germany and the US for the production of trainers

illustrates the threat that technology represents for garment exporting countries. Robots are particularly appealing in

an era of fast fashion and speed. They enable companies to cut shipping time. Adidas estimates a cut of delivery

time from 12-18 months to less than a week and maybe even a day. These factories will create about 160 production

jobs, compared with a thousand or more in a typical factory in Asia.

75

4.2 Recommendations for Bangladesh’s Policy Makers

Our findings point to an absence of market mechanisms to ensure that value creation and value

appropriation in Bangladesh’s garment production are aligned for all participants. Inconsistent

with the widespread public opinion, we show that Bangladesh’s manufacturers appropriate

considerable value through their participation in the supply chain, which is aligned with their value

creation. We also show that these are on par with those of the lead firms. The major distortion we

document is in relation to garment employees. Such a situation calls for policy intervention to

correct for this distortion. There are several means to address this concern. The most apparent one

is to raise the minimum wage levels for garment employees, particularly for those at the lower

level of the pay scale who lack negotiating power. The government should also support labour

unionization and assist employees in overcoming resistance by factory owners to such attempts,

so that labour can speak in unified voice and exercise collective power. It should also provide

training for labour and labour union leaders regarding proper and responsible collective

bargaining.

There is also a need to increase the transparency requirements of Bangladeshi manufacturers. The

limited firm-level data to document the activities of these firms deprive policymakers—and the

academics and consultants who advise them—of the ability to study this industry and propose

appropriate policy responses. The growing significance of the garment industry to Bangladesh’s

economy increases the urgency of this initiative.

Furthermore, Bangladesh’s comparative advantage as a location for garment production affords

policymakers substantial leverage with global brands that they should utilize more forcefully to

remove the distortion we document in relation to labour in garment production. Bangladesh is the

world’s second largest garment exporter and has a production capacity to support large scale

production volume. It also has the lowest wage levels of all major garment production locations.

Relocating production elsewhere is, therefore, likely to raise the outsourcing cost of the global

brands and may impose greater fragmentation because few countries are able to support production

magnitudes comparable to those of Bangladesh. This will raise managerial and logistic costs

associated with global sourcing. Under such circumstances, Bangladesh’s policymakers have

considerable power to demand higher pay from global brands, a leverage they should use to

improve labour wages and overall work conditions.

As those in command of the environment that affects firms’ ability to create and appropriate value,

policy makers can impact the gains that the manufacturers derive from their participation in the

supply chain. Policy efforts are required to differentiate Bangladesh as a location for garment

production and create market conditions that remove constraints on value creation and enable firms

to upgrade their capabilities. Below we outline several suggestions with the potential to make

progress in this direction.

Differentiate Bangladesh as a Globally Competitive Location for Garment Production

Lead firms, including those who have been operating in Bangladesh for years and decades,

consider Bangladesh in a global, comparative perspective and continuously evaluate its

attractiveness as a production location relative to alternative countries. To remain competitive and

differentiate itself from these alternative production locations, policy makers need to view

Bangladesh in the same comparative manner (Sun 2016).

76

This requires identifying the competition and establishing explicit benchmarks for differentiation

efforts. Not all countries that produce garment are direct competitors. Some operate at lower value-

added activities, producing basic items (e.g., Ethiopia, Myanmar); others produce higher value-

added activities, such as high-end fashion 36 . Neighbouring countries should receive specific

attention in this exercise as they share the same geographic advantages and disadvantages, and as

such, are often more immediate competitors. Attention should be given not only for immediate

competitors but also for those that may pose a competitive threat in the future (UNIDO 2015).

Some African countries (e.g., Ethiopia) might pose such threat.

The next step requires the identification of the criteria employed by lead firms to select the country.

Some of these criteria vary across firms, but there are factors that apply at different levels to all of

them. Lead time is a case in point. It is a major selection criterion employed by all lead firms, to

such an extent that some are switching production to nearby countries to save on shipping time.

US firms, however, still prefer Asia but increasingly outsource to South America, whereas

European firms are moving their production to the neighbouring Eastern European countries

(Bruce and Daly 2006; Pious and Burns 2015). Bangladesh performs poorly in terms of lead time.

China and India provide a 55- and 65-day delivery time respectively, while Bangladesh is at 90 to

120 days (Hoque 2013). Global garment buyers surveyed by the World Bank ranked Bangladesh

lowest among six garment exporters in Southeast Asia on this dimension (Lopez-Acevedo and

Robertson 2016). Policy makers should take actions to remove obstacles to speedy production and

delivery by developing infrastructure and utilities. They should also direct special promotional

efforts to neighbouring countries, such as Japan, to whom Bangladesh is attractive due to its

geographic proximity. In fact, RMG export to Japan is rising rapidly in recent years with several

Japanese buyers setting up offices in Bangladesh and expanding their business.

Acknowledgement ought to be made of the value assigned by global brands for critical mass in

making their location choices. Half the US and European chief purchasing officers (CPOs) of the

largest European and US apparel companies outsourcing from Bangladesh surveyed by McKinsey

mentioned capacity as the second big advantage of Bangladesh’s garment industry (behind only

cost advantage), which offers the ability to produce larger volume orders (McKinsey 2011)

Safety is becoming an increasingly crucial aspect of countries’ comparative advantage, to an extent

that it may overwhelm most other considerations. The recent casualties in Bangladesh, and

particularly the deliberate and explicit targeting of foreigners, might pose a threat for expansion of

Bangladesh’s integration in the global garment supply chain if they are not tackled with utmost

priority. Governments’ efforts in this regard should be communicated properly to the world.

Seek Low-Cost Access to Export Markets

Access to markets on terms that are comparable with those of the competition is critical in the

export-intensive garment supply chain and a major determinant of lead firms’ location choices.

Half of respondents to a survey of the US Fashion Industry Association expect to strategically

adjust or redesign their supply chain based on the Trans-Pacific Partnership (TPP), and three-

quarter of them indicated that they will source more textiles and apparel from TPP partners if the

36 Traditionally most of this production has been outsourced to Italy, but China is emerging as a location for such

activities.

77

agreement comes into effect (Lu 2015).

Since the study was conducted, the US decided to pull out of the TPP, which calls into question

its survival and relevance, but the critical importance of trade agreements for the long-term

survival and prosperity of Bangladesh’s garment industry has not changed. Bangladesh has the

lowest numbers of regional and bilateral trade agreements among Southeast Asian garment

exporting countries (Lopez-Acevedo and Robertson 2016). This issue is particularly disturbing in

relation to Vietnam, its closest competitor, placing Bangladesh at a comparative disadvantage in

terms of its access to major export markets.

Facilitate Consolidation: Differentiate Bangladesh in Size and Scope of Garment Manufacturers

Scale and scope afford garment manufacturers considerable advantages, as they enable them to

share overheads and improve their bargaining power with lead firms. The latter prefer to work

with large manufacturers whose scale matches their own, to avoid inefficient fragmentation of

their production. They also value the ability of larger manufacturers to embrace the investment

required in areas such as technology or safety upgrades. A joint OECD/WTO/IDE-JETRO (2013)

survey of lead firms in apparel and textiles sectors around the world found that they prefer to

source from a small number of large suppliers with ‘one-shop-give-all’ firms, mostly for speed

consideration, favouring scope expansion and vertical integration of large firms. Size and scope

enable manufacturers to handle larger shares of lead firms’ business, increasing the latter’s

switching costs and, at the same time, to handle larger number of customers, reducing their

dependency on individual buyers.

Despite this prodigious economic logic, garment production has remained highly fragmented37. As

Figure 10 illustrates, the number of establishments in Bangladesh has grown continuously since

the inception of the industry, rising from 384 in 1984-5 to a peak in 2012-13 at almost 6000

establishments, before falling after the Rana Plaza collapse to around 4000 and remaining at this

level since then (see also Zaid and Monzur 2014). The pressure for compliance and safety

standards that followed the Rana Plaza collapse spurred some consolidation, as the smaller and

weaker manufacturers were unable to meet the new standards. Figure 10 also shows that the size

of establishments had been declining continuously, pointing to productivity improvement rather

than growth in size (Figure 9). Productivity improvements have achieved significant momentum

in recent years, perhaps reflecting the exit of less productive establishments due to the contingent

requirements imposed after the Rana Plaza collapse (Zaid and Monzur 2014). Moreover,

notwithstanding an increase in the scope of some manufacturers through backward vertical

integration, most of Bangladesh’s manufacturers have remained narrowly focused.

37 Similar industry structure exists in other garment producing countries: Sri Lanka and India are estimated to have

respectively 300 and 28,000 garment factories (Jayasinghe 2016).

78

Figure 10. Bangladesh RMG Industry: Number of Establishments and Establishment Size, 1984-

2015

Own calculation based on data from Bangladesh Garment Manufacturers and Exporters Association (BGMEA)

http://www.bgmea.com.bd/home/pages/tradeinformation

This situation points to the presence of some obstacles that arrest a natural process of consolidation

and calls for policy intervention to remove them. Governments can play a major enabling role in

the provision of the resources needed for such expansions, presumably capital and managerial

skills. Notwithstanding a fairly developed local equity markets, the garment manufacturers are all

privately owned, relying for their finances on debt and internal resources, which may not suffice

for this endeavour.

Facilitate Manufacturers’ Upgrade to Higher Value-Added Activities

Since the emergence of the garment industry in the 1980s, Bangladesh’s main comparative

advantage has been low cost, enabled by low labour cost and government support that had reduced

the cost of doing business for Bangladesh’s manufacturers. Bangladeshi labour costs are the lowest

of the top 25 apparel-exporting countries. With about $68 per month minimum wage to low-skilled

employees in 2013, it compares favourably with $79 in Pakistan, $80 in Cambodia, $120 for

Vietnam and India, and $270 for China (ILO 2013; Luebker 2014). The global buyers surveyed

by the World Bank ranked Bangladesh as number one in terms of cost competitiveness among

eight Asian countries and suggested that Bangladesh cost advantages are so substantial that they

make up for shortcoming in other areas such as quality and lead time (Lopez-Acevedo and

Robertson 2016).

0

500

1000

1500

2000

2500

3000

3500

0

1000

2000

3000

4000

5000

6000

7000

19

84

-85

19

85

-86

19

86

-87

19

87

-88

19

88

-89

19

89

-90

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16

Number of establishments Establishments Size, Average number of employees

79

Indeed, Bangladesh has become a primary destination for companies that compete on price and

specialize in low- and mid-market priced apparel. Naturally, these companies are highly price

sensitive and create constant pressure on manufacturers’ prices. This deprives the manufacturers

of resources for investment in capability upgrading and creates vicious circles whereby they are

trapped in low-end activities at the bottom of the value chain, with limited differentiation beyond

cost (Quelch 2007). They withdraw into a ‘race for the bottom’ and have no option but to accept

prices set up by the lead firms. These circumstances call for government intervention to assist

manufacturers to escape the commodity trap by providing resources, notably capital, for

capabilities upgrade.

Government policy has played a major role in supporting this outcome. The gist of its policy,

essentially since the emergence of the industry, has been to lower the cost of doing business for

the manufacturers, making them more cost competitive. The generous support of the

government—in the form of tax and duty exemptions described above—has surely played a major

role in enabling Bangladeshi manufacturers to maintain this cost level. This policy was

instrumental in encouraging the emergence and development of the industry but may no longer be

appropriate at the current stage of the industry. It appears that the industry has reached a level of

maturity that requires policy change from cost benefits to skills upgrade. Continuous government

support in the form of past policies may even arrest a natural upgrade process and harm the future

development of the industry. A large body of academic research supports the notion that state-

guided policies can be helpful to mobilize resources at the early levels of development, but can

become a serious drag on productivity and innovation—the very factors needed for the transition

to middle income economies. Prolonged government support that shields firms from competitive

forces often leads to negative consequences as it reduces productivity and arrests innovation (Lee

1996; Baldwin 2004). Policy actions should be directed instead towards the provision of the

resources required to assist garment manufacturers to upgrade their skills.

Low cost is not the only means of participation in global supply chains, and Bangladesh

policymakers need to create the conditions for participation that is based on specialization rather

than on costs—that is, horizontal specialization rather than vertical specialization, which is based

on firms’ specialization and excellence rather than on wage gaps (Baldwin 2012)38.

When introducing such policies, Bangladesh’s policymakers may borrow a page from other textile

producing countries that have implemented successfully such skill upgrades. Tokatli and Kizilgun

(2004, 2009) describe how—despite the absence of cost advantage of Turkey garment producers

(Turkey garment unit price is triple that of Bangladesh)—skill upgrade had brought about such a

transformation and turned Turkey to a leading apparel exporter. The skill upgrade resulted in

fundamental changes in the structure of the industry and the nature of the participating firms with

the most successful among them able to develop their own design capabilities and brand name39.

38 One example of this form of specialization is the US auto industry where there is more US off shoring to high-

wage Canada than there is to low-wage Mexico. Baldwin (2012) provides evidence of the broader prevalence of

such patterns among neighboring high-wage countries like Canada and the US, and within Western Europe. 39 A notable example of these developments is Mavi Jeans, which had transformed itself from a jeans manufacturer

into a branded firm. It sells its own branded jeans worldwide, including in some of the most prestigious fashion

department stores such as Nordstrom, Macy's and Bloomingdale's, and operates its own stores in the world’s most

advanced cities (Tokatli and Kizilgun 2004).

80

A similar change took place in Mexico (Gereffi 2005). As manufacturers move up the value chain,

their negotiating power increases, enabling them to appropriate greater value. As capital is

replacing labour in the implementation of the more automated, repetitive jobs (ILO and Asia

Development Bank 2014), this need becomes ever more urgent.

Participation in global supply chains has been recognized as a promising venue for learning and

upgrading, as firms are being drawn into global networks of interactions and relationships,

including with more technologically advanced firms, and can benefit from the transfer of

technological knowledge (Gereffi 1999, 2005; Görg and Seric 2013). However, research

consistently shows that firms’ ability to learn and upgrade themselves by participating in global

supply chains rests on their own technological resources and capabilities. This research also finds

that a majority of emerging-market firms are unable to benefit from this opportunity due to their

limited capabilities that constrain their learning capacity (Marchi, Giuliani and Rabellotti 2016).

In a large-scale study of firms in 19 African countries, Görg and Seric (2013) find that the

upgrading of domestic firms supplying to global firms is contingent upon assistance from the

government or the global firms, which calls for policy action. Such capability upgrading is

particularly urgent in the contemporary environment where global brands are shifting production

back home, taking advantage of automation and other cost-saving practices.

Upgrades to higher value-added activities have become more imperative with the growing threat

for low cost, low skill production from both technology and firms’ strategies. Recent trends have

caused apparel companies to return production back home, responding to the changing consumer

agenda and the greater value they place on the ‘made in…’. A study of Italian firms has

demonstrated a trend for reshoring, driven by consumers’ new sensitivities to country of origin, as

well as demand for customization and personalization that creates need for firms to locate in

proximity to their customers to stay in touch with demand and to reap synergies with other value-

added activities, suggesting that in these industries ‘the smiling curve does not smile’ (Bettiol

2017)40.

Data and Information

Information asymmetries are prevalent throughout the supply chain and are particularly severe in

the local part of the chain, creating grounds for various types of market failures and various sorts

of distortions in the working of markets and jeopardizing the full materialization of many potential

benefits that Bangladeshi stakeholders can derive from their participation in the global chain of

garment.

It might well be that some of the imbalance we document in the value chain—notably consumers’

power and their ability to claim value, and the imbalance between value creation and appropriation

with reference to labour in the production—are a result of information asymmetries. Consumers

in the major markets for garment are well informed and have access to a substantial amount of

information, and this puts them in a very strong power position versus lead firms. Labour in

40 One means by which the Bangladesh government could assist the upgrading of local manufacturers is by

encouraging expansion outside Bangladesh. Fibre2Fashion magazine reports anecdotal observations of some

Bangladeshi firms that are keen to invest in the Ethiopian apparel sector (Fibre2Fashion, December 2016).

81

Bangladesh, in contrast, are not informed and this weakens their negotiating power with the

manufacturers.

Policymakers can play critical role in fostering information and making it easily available to all

relevant participants. Information was shown to be vital for the efficient flow of goods and

intermediaries along value chains. By virtue of their position and the resources at their disposal,

policymakers can access information that is not otherwise available on the market and far exceed

what individual participants can access on their own. One initiative that moves in this direction is

the introduction and overseeing of industry standards, which would reduce buyers’ search costs

and serve as a formal way of differentiation for manufacturers. Notable industry standards may

include product quality or governance codes, which are notoriously difficult to evaluate by

individual companies and difficult to communicate in a credible manner. Research has shown that

factories working for major brands have better working conditions, while the smaller factories are

still working to ensure labour standards, all of which agrees with research that shows that being

connected to global networks—via either trade or outsourcing linkages—acts to improve labour

conditions (Berik and Rodgers 2010).

4.3 Recommendations for Lead Firms

The vast magnitude of the brands’ activities, coupled with their broad global scope, afford them

the resources and skills to make significant contributions and play a dominant role in improving

labour conditions in Bangladesh’s factories. Most of the efforts embraced by global brands in

Bangladesh, many of which led by H&M—Bangladesh’s largest garment buyer and a predominant

advocate of labour rights even before the Rana Plaza and most notably after the tragedy—have

focused on improvement of safety in Bangladesh’s garment factories. As worthy as these attempts

are, global brands need to both widen and deepen the scope of their involvement and play a more

active and decisive role in instilling change and extend the sphere of their activities beyond safety

alone, to encompass broader governance issues in garment factories.

Increase Value Creation

As those who construct and manage the supply chain, the lead firms are in command of the value

created by the supply chain as a whole. While all other participants are concerned with improving

their own value creation and appropriation, lead firms face a dual task: improving their own value

creation as well as that of the chain as a whole.

There are several inherent tensions in the management of supply chains that bring together

otherwise independent organizations, with their own histories and distinctive attributes, to work in

collaboration. Notable among them is the challenge of striking a balance between long-term

relationships and flexibility. The latter is a major virtue of supply chains, which offer the advantage

of making low-cost adjustments to changes in market demand and competitive dynamics. At the

same time, however, long-term relationships are essential for the establishment of trust and

effective work relationships that foster collaboration. Lead firms must also attend to inherent

tensions between the interests of individual participants and those of the chain as a whole. These

are often not aligned and pose a challenge for the collaborative work.

The tasks associated with the creation of value by the management of supply chains are different

82

from those associated with the management of a firm and require different managerial capabilities

and skills. Value creation through supply chains is based on the ability to access competencies that

firms do not have nor own, and to manage them effectively. This requires competencies in

connecting to others and the ability to draw together multiple participants into a flexible and

adaptable supply chain that maximizes the synergies among them (Kale, Singh and Bell 2009;

Wind, Fung and Fung 2009).

Turn the Supply Chain into a Source of Competitive Advantage

Competitive advantage can originate in the construction of the value chain, the distinctive

combinations that firms strike between activities they maintain in-house and those they outsource,

as well as in the selection of destinations and outsourcing targets. Indeed, there are considerable

variations in this regard among global brands in the fashion industry—with Zara’s vertically

integrated model at one end, H&M’s outsourcing-based model at the other, and different

combinations in between. Uniqlo’s supply chain, for example, combines elements from both

models, and Ralph Lauren’s has its own distinctive combinations, opening up possibilities to create

a unique and inimitable competitive advantage.

The structure and management of supply chains that are suitable for each firm varies, because they

are based on the match between the firm’s business model and its distinctive set of strengths and

weaknesses. This fit makes the appropriate choice distinctive for each firm. Even though such

advantages are largely not observable and not easily understood by outsiders, they could provide

sustained competitive advantage.

Value creation by the supply chain lies in the intersections among the different activities and the

coordination among them. A modularization of the value chain and the development of

coordination capabilities require a shift in mind-set from country-based activities to a portfolio

approach. Developing a modulator approach also requires the development of capabilities to

manage interdependencies among the constituent parts.

Develop Close Partnership with Bangladesh’s Manufacturers

The collaborative nature of value creation in supply chains entails a propensity for individual

participants to act in the interest of others who are dependent on them for their own ability to create

value (Tricoire and Clayton 2015). Viewing manufacturers as long-term partners rather than as

suppliers, and fostering their growth alongside their own, is thus in the interest of lead firms and

is likely to encourage collaboration and enhance value creation (Park and Dickson 2008). Lead

firms should embrace such relationships and commit sufficient resources to establishing and

nurturing them.

This requires a deep understanding of the manufacturers’ business, such that lead firms can

understand their costs and set up payments that reassure comfortable margins, for instance, by

sharing the consequences of fluctuations in the price of raw material, as they affect the cost of the

manufacturers. The lead firms should also take interest in developing the skills of their

manufacturers by best-practice sharing and the provision of feedback on quality, delivery time,

and so on. It also involves sharing knowledge with suppliers and reducing knowledge asymmetries

between lead firm and their suppliers. Through these efforts, lead firms can take a note from

Japanese firms, who excel in developing close and productive relationships with their suppliers’

83

network. This ability is frequently cited as a major reason for their success (Liker and Choi 2004).

The development of close, long-lasting relationships is not cost free. Lead firms (buyers) become

constrained by their investment in the development of the relationships, and this weakens their

position vis-à-vis the manufacturers. This is stronger in weak institutional environments in which

relationships substitute for institutions and tie the buyers strongly to the suppliers.

Actively Manage Information Flow in the Supply Chain

Lead firms are in command of the circulation of products within the supply chain. These activities

should be supplemented by active encouragement of a corresponding flow of information, which

is as vital for value creation as the flow of products (Bowersox, Closs and Stank 1999; Hansen

2002; Netessine 2009).

Integrating knowledge that resides among different participants who are independent organizations

is a challenging task. At the most basic level, there is a need to develop a common understanding

and shared meanings to enable the effective utilization of that knowledge by various participants

(Huber 1991; Handfield and Nichols 2002). This often requires bridging different perceptions and

views of concepts that are fundamental for value creation in supply chains, such as quality and

timeliness (Hult, Ketchen and Ernest 2002). It also demands firms to overcome resistance for

knowledge-sharing with other participants with whom a focal firm does not have ownership ties.

Research shows that knowledge-sharing within supply chains significantly affects supply chain

performance. It increases participants’ awareness of other participants’ needs and enables them to

perform their own role in agreement with those needs, enhancing the functioning of the supply

chain (Hult, Ketchen and Slater 2004).

84

Chapter 5 Conclusions

Globally spread supply chains have become a predominate means of value creation in a growing

number of industries. Deepening the understanding of their significance for the prosperity of firms

and countries has gained considerable importance, fundamental for the way lead firms organize

their value creation activities, turning them into a source of differentiation and a major determinant

of competitive performance and long-term survival (Kleindorfer and Wind 2009; Tricoire and

Clayton 2015). By offering a detailed study of one global supply chain, this study serves to deepen

the understanding of ways by which lead firms can maximize the benefits they derive from their

participation in supply chains and, at the same time, play a role in appropriation of value in an

equitable manner by other participants in the chain, such as producers and labour.

Our findings document that international value creation and value appropriation in the global

garment supply chain are largely aligned with the shares created and appropriated by

manufacturers and lead firms, and are on par with each other. The main distortion we document is

in relation to the labour employed in garment production, whose value creation and value

appropriation measured respectively by productivity and wages, appear to be misaligned. In the

absence of market mechanisms to correct for this distortion, we advance a call for policy

intervention that will address this shortcoming, and outline policy measures that should be taken

to protect labour rights.

In this emerging reality, firms do not create value by themselves but rather through their supply

chains; thus, their focus should shift from the development of their own capabilities to the ability

to create value in collaboration with partners in the supply chain. Our articulation of value creation

and value appropriation as distinct yet related dimensions of supply chains serve to identify the

capabilities needed to effectively partake in them. By outlining the varying market dynamics of

these two dimensions of supply chains, we offer firms and policymakers the means to develop

appropriate responses that maximize their gains in a win-win mode.

5.1 Future Research

This study opens up large areas for future research. For example, the broader validity of the study

beyond the garment supply chain at a given point in time, in the specific segment of the industry

that was the focus of this study, is an issue for empirical examination by future research. Industrial

characteristics and dynamic changes over time in supply chains modify the nature of value creation

and value appropriation and may restrain the ability to generalize our findings. Also, distinctive

features of the garment industry in Bangladesh may constrain the broader applicability of the study

and its implications, even for other garment exporting countries in Asia. Broader validity might be

examined also within the garment industry at different levels of quality and prices (e.g., low versus

high-end clothing). This could be particularly illuminating in substantiating our suggestion that

skills upgrade is likely to increase manufacturers’ ability to appropriate value by increasing their

negotiating power. Validity might be constrained also over time. A notable factor that limits

temporal validity is the changing balance between capital and labour in production over time. This

might be relevant in our study which took place in the aftermath of the Rana Plaza, arguably a very

distinctive time period that had strong influence on the very issues we studied here. The framework

85

we developed here can be employed to examine the balance between value creation and

appropriation across other industries and over time.

A noteworthy direction for future research is to study the balance between value creation and

appropriation in relation to employees in other parts of the garment supply chain. Employment in

this supply chain involves multiple and wide-ranging employment groups, with varying skills and

pay levels.

Progress could also be made by studying Bangladesh in a comparative perspective with other

garment exporting countries. Particularly noteworthy are countries at a similar development stage

to Bangladesh, such as Cambodia (Stephenson 2013). Such comparison could shed light on the

extent to which idiosyncratic country characteristics affect our findings, and offer insights

regarding their broader validity beyond Bangladesh. One aspect that such a comparative study

would help clarify is the impact of competitive intensity on labour wages and labour conditions,

and whether the burden from an increased level of competition is fairly distributed among lead

firms, manufacturers and employees.

The study of other aspects of working conditions—such as working hours, benefits, and working

environments—is another warranted direction for future research. Such a study would offer a fuller

picture on whether the workers appropriated fair shares of values in the process of rapid growth of

the Bangladesh garment industry.

Future research may also examine different shapes of the ‘smiling curve’ across industries and

within them, and show how firms create value in different types of activities in the same supply

chains. The comparison between Toyota versus GM is a case in point. Toyota creates substantial

value in manufacturing itself as compared to other car manufacturers. Apple versus Microsoft

suggests another example. Apple turned the manufacturing itself into a source of value creation,

whereas other computer-producing firms have outsourced these activities to a third party. In the

garment industry, Zara versus H&M demonstrates a similar situation.

Yet another task for the future is to deepen the understanding of the relationships among the three

explanations we offer for the distinctiveness of the garment value chain in terms of value creation

and appropriation. In our discussion, we present some suggestive explanations based on

comparisons with supply chains in other industries, for instance, in terms of the intensity of the

competition and the price pressure on lead firms and lead firms’ investment in the creation of social

value, as well as in other garment-producing countries, notably in relation to government support.

Such comparisons enable us to hold constant the impact of one of the explanations while

examining the other, and may throw light on these relationships.

Lastly, future research should place our study in the broader context of the debate on environmental

deterioration and examine the environmental consequences of garment production and the growing

demand for clothing. Special attention should be paid by this research to ethical purchasing and

global sustainability, notably through the Global Reporting Initiative (GRI) and Sedex Information

Exchange, with consideration of the impact of garment production on these issues.

86

References

Adegbesan J.A. 2009. On the origins of competitive advantage: Strategic factor markets and

heterogeneous resource complementarity. Academy of Management Review, 34(3): 463–475.

Adegbesan J.A. and Higgins M.J. 2011. The intra-alliance division of value created through

collaboration. Strategic Management Journal, 32(2): 187–211.

Ahern K.R. 2012. Bargaining power and industry dependence in mergers. Journal of Financial

Economics, 103(3): 530-550.

Ahmed N. 2009. Sustaining ready-made garment exports from Bangladesh. Journal of

Contemporary Asia, 39(4).

Ahmed N. 2015. Achieving garment export target of 50 billion dollars by 2021: Role of

Chittagong. Paper prepared for Bangladesh Garments Manufacturers and Exporters Association

(BGMEA) for the Apparel Expo Chittagong.

Ahmed N. and Peerlings J. 2009. Addressing workers’ rights in the textile and apparel industry –

Consequences for the Bangladesh economy. World Development, 37(3).

Ali-Yrkko J., Rouvinen P., Seppala T. and Yla-Anttila P. 2011. Who captures value in global

supply chains? The Research Institute of the Finish Economy, Discussion Paper 1240.

Anner M., Bair J. and Blasi J. 2012. Buyer power, pricing practices, and labor: Outcomes in global

supply chains. University of Colorado at Boulder, working paper.

Apparel Magazine. 2015. The global out-of-stock crisis. Apparel Magazine, Newsletter November

03.

Apparel Magazine. 2016. Technology Trends in Fashion: Six New Digital Technologies

Improving Supply Chain Visibility, Collaboration, and Efficiency from Design through

Production. White paper, Apparel Magazine.

BCG Perspective. 2015. The Robotics Revolution. Boston Consulting Group.

Bagnoli M. and Watts S. 2003. Selling to socially responsible consumers: Competition and the

private provision of public goods. Journal of Economics & Management and Strategy, 12(3): 419–

445.

Bain M. 2015. The thing that makes Bangladesh’s garment industry such a huge success also

makes it deadly. Quartz, April 29. https://qz.com/389741/the-thing-that-makes-bangladeshs-

garment-industry-such-a-huge-success-also-makes-it-deadly/

87

Baldwin R. E. 2004. Openness and growth: What’s the empirical relationship? In R. E. Baldwin

and L. A. Winters (Eds.), Challenges to Globalization: Analyzing the Economics. University of

Chicago Press: Chicago and London.

Baldwin R. E. 2012. Global supply chains: Why they emerged, why they matter, and where they

are going. Centre for Economic Policy Research (CEPR), Discussion Paper No. DP9103.

Barnett M. 2011. Trend-spotting is the new £36bn growth business. The Telegraph, May 1st.

Berik G. and Rodgers YVMD. 2010. Options for enforcing labour standards: Lessons

from Bangladesh and Cambodia. Journal of International Development, 22: 56-67.

Besley T. and Ghatak M. 2007. Retailing public goods: The economics of corporate social

responsibility. Journal of Public Economics, 91(9): 1645–1663.

Bettiol M. 2017. Industrial district firms do not smile: Structuring the value chain between local

and global. In Pederson T. and Camuffo A. (Eds.), Advances in International Management: Global

Supply Chains. Forthcoming

Birtwistle G., Siddiqui N. and Fiorito S.S. 2003. Quick response: perceptions of UK fashion

retailers. International Journal of Retail & Distribution Management, 31(2): 118-128.

Bishop M. 2016. Executive Guide to Responsible Global Production 2016, Part 1: The State of

Global Compliance. Apparel Magazine, White Paper.

Bowersox D. J., Closs D. J. and Stank T. P. 1999. 21st Century Logistics: Making Supply Chain

Integration a Reality. Oak Brook, IL: Council of Logistics Management.

Bowman C. and Ambrosini V. 2000. Value creation versus value capture: Towards a coherent

definition of value in strategy. British Journal of Management, 11: 1-15.

Brandenburger A.M. and Stuart H.W. 1996. Value-based business strategy. Journal of Economics

and Management Strategy, 5(1): 5-24.

Brandenburger A.M. and Stuart H.W. 2006. Biform games. Management Science, 53: 537-549.

Bruce M. and Daly L. 2006. Buyer behavior for fast fashion. Journal of Fashion Marketing and

Management. 10(3): 329-342

Capgemini Consulting and GT Nexus. 2016. The Current and Future State of Digital Supply Chain

Transformation. White Paper, Capgemini Consulting and GT Nexus.

Carroll M. 2012. How fashion brands set prices. Forbes, Feb. 22.

88

Chalabi M. 2014. Where the U.S. gets its clothing: One year after the Bangladesh factory collapse.

FiveThirtyEight.com. April 23rd.

Chalmers J. 2013. Special Report: How textile kings weave a hold on Bangladesh.

http://www.reuters.com/article/us-bangladesh-garments-special-report-

idUSBRE9411CX20130503

Chatain O. 2010. Value creation, competition and performance in buyer-supplier relationships.

Strategic Management Journal, 32(1): 76-102.

Chatain O. and Zemsky P. 2011. Value creation and value capture with frictions. Strategic

Management Journal, 32(11): 1206-1231.

Choi T.M. and Sethi S. 2010. Innovative quick response programs: A review. International

Journal of Production Economics, 127: 1-12.

Choudhury S.R. and Hussain G. 2005. Post-MFA issues and challenges: Social dimension. In ILO

(Ed.), RMG Industry, Post MFA Regime and Decent Work: The Bangladesh Perspective.

Proceedings of the National Tripartite Meeting, Dhaka, August.

Clean Clothing Campaign. 2015. General Factsheet Garment Industry. February.

https://cleanclothes.org/resources/publications/factsheets/general-factsheet-garment-industry-

february-2015.pdf/view

Coff R.W. 1999. When competitive advantage doesn’t lead to performance: the resource-based

view and stakeholder bargaining power. Organization Science, 10(2): 119–133.

Cowgill M. and Huynh P. 2016. Weak minimum wage compliance in Asia’s garment industry.

ILO Asia-Pacific Garment and Footwear Sector Research Note, Issue 5.

The Daily Mail. 2017. Top brands including H&M, Zara to boycott Bangladesh garment summit.

The Daily Mail, February 22.

The Daily Star. 2009. 29 garment industry owners elected to the ninth parliament. The Daily

Star, January 12.

D’Arcy P., Norman D. and Shan S. 2012. Costs and margins in the retail supply chains. Reserve

Bank of Australia Bulletin. June quarter.

Dedrick J., Kraemer K.L. and Linden G. 2009. Who profits from innovation in global value chains?

A study of the iPod and notebook PCs. Industrial and Corporate Change, 19(1): 81-116.

Dedrick J., Kraemer K.L. and Linden G. 2011. The distribution of value in the mobile phone supply

chain. Telecommunications Policy, 35(6): 505–521.

Donaldson T. 2016a. Here are the biggest threats to the global supply chain in 2016. The Sourcing

89

Journal, March 24.

Donaldson T. 2016b. New seaborne shipping rules could increase the cost of trade. The Sourcing

Journal, March 22.

Donaldson T. 2016c. Alliance: Bangladesh garment factory fires have dropped by more than 90%.

The Sourcing Journal, April 13.

Donaldson T. 2016d. H&M to source more apparel from Bangladesh. The Sourcing Journal,

March 14.

Donaldson T. 2016e. State of Trade 2016. The Sourcing Journal, May 16.

Donaldson T. 2016f. H&M to open 425 new stores. The Sourcing Journal, January 28.

Donnan S. 2014. Jeans maker launches cheap financing for more ethical factories. Financial

Times, November 4.

The Economist. 2017. Clothing companies: Green is the new black. The Economist, April 8.

Ellis S. 2013. Supply Chain Visibility: Governing the Flow of Data in Manufacturing and

Logistics. IDC Manufacturing Insights, White Paper.

Elm D. and Low P. (eds.), 2013. Global Value Chain in a Changing World. Fung Global Institute,

NTU and World Trade Organization, Geneva.

European Commission. 2015. Technical Status Report: Bangladesh Sustainability Compact. The

European Commission, Brussels.

Fair Wear Foundation. 2012. Fair Wear Foundation audit manual.

https://www.fairwear.org/resource/fwf-audit-manual-2012/

Gerard D. 2011. Dividing the pie—made in China, sold in the U.S. Lawrence University,

Economics Dept. Blog.

Gereffi G. 1999. International trade and industrial upgrading in the apparel commodity chain.

Journal of International Economics, 48: 37-70.

Gereffi G. 2005. Export-oriented growth and industrial upgrading: Lessons from the Mexican

apparel case: a case study of global value chains analysis. Department of Sociology, Duke

University, Durham, NC, working paper.

Gereffi G. and Memedovic O. 2003. The Global Apparel Value Chain: What Prospects for

Upgrading by Developing Countries. United Nations Industrial Development Organization,

Vienna.

90

Godart F. 2012. Unveiling Fashion: Business, Culture and identity in the most Glamorous

Industry. INSEAD Business Press, Palgrave McMillan, Houndsmills.

Görg H. and Seric A. 2013. With a little help from my friends: Supplying to multinationals, buying

from multinationals, and domestic firm performance. UNIDO Development Policy, Statistics and

Research Brunch,

Gunasekarana A., Laib K. and Chengb T.C. E. 2008. Responsive supply chain: A competitive

strategy in a networked economy. The International Journal of Management Science, 36: 549-564.

Hague P. 2010. Measuring brand value–How much are brands worth? B2B International

https://www.b2binternational.com/publications/value-of-brands/

Haque A.K.E. and Estiaque B. 2015. Garments Workers in Bangladesh: Social Impact of the

Garment Industry. Asian Center for Development.

Handfield R. B. and Nichols, E. L. 2002. Supply Chain Redesign: Transforming Supply Chains

into Integrated Value Systems. Upper Saddle River, NJ: Prentice-Hall.

Hansen M. T. 2002. Knowledge networks: Explaining effective knowledge sharing in multiunit

companies. Organization Science, 13: 232–249.

Hoffman A. 2014. H&M's Global Supply Chain Management Sustainability: Factories and Fast

Fashion. University of Michigan ERB Institute case number W93C73.

Hongjoo W. and Byoungho J. 2016. Culture doesn’t matter? The impact of apparel companies’

corporate social responsibility practices on brand equity. Clothing and Textiles Research Journal,

34(1): 20-36.

Hoque A. 2013. Analyzing and modeling of supply chain performance in Bangladesh Ready Made

Garments. MBA thesis, Ritsumeikan Asia Pacific University, Japan.

Huber G. P. 1991. Organizational learning: The contributing processes and the literatures.

Organization Science, 2: 88 tion.

Hult G. T. M., Ketchen D. J. and Ernest N. L. 2002. An examination of cultural competitiveness

and order fulfillment cycle time within supply chains. Academy of Management Journal, 45(3):

577-586.

Hult G. T. M., Ketchen D. J. and Slater S. F. 2004. Information processing, knowledge

development, and strategic supply chain performance. Academy of Management Journal, 47(2):

241-253

Human Right Watch. 2016. Bangladesh: Garment Workers’ Union Rights Bleak. April 21.

ILO. 2013. Bangladesh: Seeking better employment conditions for better socioeconomic

91

outcomes. ILO, Geneva. November.

ILO and Asian Development Bank. 2014. Asian Community 2015: Managing Integration and

Better Jobs and Shared Prosperity. ILO and Asian Development Bank, Bangkok.

Jacobides M.G., Knudsen T. and Augier M. 2006. Benefiting from innovation: Value creation,

value appropriation and the role of industry architectures. Research Policy, 35: 1200-1221.

Jayasinghe M. 2016. The operational and signaling benefits of voluntary labor code adoption:

Reconceptualizing the scope of human resource management in emerging economies. Academy of

Management Journal, 59(2): 658-677.

Kaelin J. 2016. Transforming Procurement: How to Bring Colleagues Along. Apparel Magazine,

May 18.

Kale P., Singh H. and Bell J. 2009. Relating well: Building capabilities for sustaining alliance

networks. In Kleindorfer and Wind (Eds.), chapter 20.

Kang J and Hustvedt G. 2014. The contribution of perceived labor transparency and perceived

corporate giving to brand equity in the footwear industry. Clothing and Textiles Research Journal,

32, 296–311.

Kapner S. 2016. Michael Kors, Ralph Lauren Battle Discounting, Fewer Shopper Visits. Wall

Street Journal, Aug. 10.

Kish M. 2014. The cost breakdown of a $100 pair of sneakers. Portland Business Journal, Dec.

16.

Kleindorfer P.R. and Wind Y. (Eds.), 2009. The Network Challenge: Strategy, Profit and Risk in

an Interlinked World. Pearson Education, New Jersey.

Koopman R., Powers W., Wang Z. and Wei S.J. 2010. Give credit where credit is due: Tracing

value added in global production chains. NBER, working paper 18186.

Kraemer K.L., Linden G. and Dedrick J. 2011. Capturing value in global networks: Apple iPad

and iPhone. Mimeo UC Irvin and Berkeley.

http://pcic.merage.uci.edu/papers/2011/value_ipad_iphone.pdf

Krasteva S. and Yildirim H. 2012. Payoff uncertainty, bargaining power, and the strategic

sequencing of bilateral negotiations. The RAND Journal of Economics, 43(3): 514-536.

Kunreuther H. 2009. The weakest link: Managing risk through interdependent strategy. In

Kleindorfer P.R. and Wind Y. (Eds.), Chapter 22.

Laudel T. 2010. An attempt to determine the CSR potential of the international clothing business.

Journal of Business Ethics, 96: 63–77.

92

Lee J. 1996. Government interventions and productivity growth. Journal of Economic Growth, 1:

391-414.

Leitch L. 2017. In search of sustainable style. The Economist 1843, April/May.

Li F. and Whalley J. 2002. Deconstruction of the telecommunication industry: From value chains

to value networks. Telecommunications Policy, 26: 451-472.

Liker J.K. and Choi T.Y. 2004. Building deep supplier relationships. Harvard Business Review,

82: 104-113.

Lippman S.A. and Rumelt R.P. 2003. A bargaining perspective on resource advantage. Strategic

Management Journal, 24(11): 1069–1086.

Lopez-Acevedo G. and Robertson R. (Eds.). 2016. Stitches to Riches? Apparel Employment,

Trade, and Economic Development in South Asia. World Bank Group, Washington D.C.

Lu S. 2015. U.S. Fashion Industry Benchmarking Study. White Paper, US Fashion Industry

Association, New York.

Luebker M. 2014. Minimum wages in the global garment industry. ILO Regional Office for Asia

and the Pacific, ILO.

MacDonald G. and Ryall M.D. 2004. How do value creation and competition determine whether

a firm appropriates value? Management Science, 50(10): 1319-1335.

Mandol M.S. 2008. Status of cotton in Bangladesh. Mimeo, ICAC Regional Networks, Asia. https://www.icac.org/tis/regional_networks/documents/asian/papers/mandol.pdf

Marburger, D. R. 1994. Bargaining power and the structure of salaries in major league baseball.

Managerial and Decision Economics, 15(5): 433-441.

Marchi V.D., Giuliani E. and Rabellotti R. 2016. Local innovation and global value chains in

developing countries. UNIDO/UNU‐MERIT background papers for the UNIDO, Industrial

Development Report: IDR 2016 WP 1.

Maximilian M. 2013. Creating Sustainable Apparel Value Chains – Primer on Industry

Transformation. Impact Economy Primer Series, Vol. 2, 1st Edition. Geneva.

McGregor L. 2016a. Robots will be running apparel factories by 2026. The Outsourcing Journal,

March 14.

McGregor L. 2016b. Hold Up: Ivy Park Responds to Sweatshop Accusations. The Outsourcing

Journal, May 16.

93

The Mining Journal. 2006. Value chain. Commodity Focus – Diamonds. The Mining Journal, Oct

27.

McKinsey. 2011. Bangladesh’s Ready-Made Garment Landscape: The Challenge of Growth.

McKinsey.

Mirdha R. U. 2011. Accessories growth tied to RMG. The Daily Star, March 27.

Mirdha R. U. 2016. Corporate tax for apparel cut to 20pc. The Daily Star, June 3.

Moazzem K. and Basak K.K. 2015. Margin and its relation with firm level compliance: Illustration

on Bangladesh apparel value chain. Center for Policy Dialogue (CPD), Bangladesh.

.

Molloy J.C. and Barney J.B. 2015. Who captures the value created with human capital? A market-

based view. Academy of Management Perspectives, 29(3): 309-325.

NPD (formerly National Purchase Diary). 2016. Five Proven Ways to Make Pricing Work for You.

NPD Group White Paper.

Nenni M.E., Giustiniano L. and Pirolo L. 2013. Demand Forecasting in the Fashion Industry: A

Review. International Journal of Engineering Business Management, Special Issue on Innovations

in Fashion Industry, Vol. 5, pp. 1-6.

Netessine S. 2009. Supply web: Managing, organizing and capitalizing on global networks of

suppliers. In Kleindorfer and Wind (Eds.), chapter 13.

OECD. 2001. OCED Manual: Measuring Productivity. Paris.

OECD/WTO/IDE-JETRO. 2013. Aid for Trade and Value Chains in Textiles and Apparel. WTO,

Geneva.

Olson E.L. 2013. It's not easy being green: the effects of attribute tradeoffs on green product preference

and choice. Journal of the Academy of Marketing Science, 41(2): 171-184.

Park H. and Dickson M.A. 2008. Engaging in buyer-seller partnership for fair labor management:

The role of a buyer firm's strategic emphasis. Clothing and Textiles Research Journal, 26(1) 41-

56.

Pious J. and Burns, A. 2015. Excellence in Global Sourcing. Apparel Magazine, July 31.

Porter M. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The

Free Press, New York.

Potts E. 2016. The Downward Spiral of Apparel Discounting. Euromonitor Analysis, Feb 12.

Powell B. 2014. Out of Poverty: Sweatshops in the Global Economy. Cambridge University Press,

Cambridge UK.

94

Quelch J. 2007. How to avoid the commodity trap. Harvard Business Review, December.

Riahi-Belkaoui A. 1999. Value Added Reporting and Research: State of the Art. Qourum Books,

CT.

Seddon J. 2013. The Brand in the Boardroom: Making the Case for Investment in Brand. Ogilvy

& Mather, Red Paper series no. 6.

Sen A. 2008. The US fashion industry: A supply chain review. International Journal of

Production Economics, 114(2): 571-593.

Shaheen A., Raihan M.Z. and Islam N. 2013. Labor unrest in the ready-made garment industry

of Bangladesh. International Journal of Business and Management, 8(15): 7-22.

Spar D. 2002. Forever: De Beers and US antitrust law. Harvard Business School case number 9-

700-082.

Star Business Report. 2016. Reduced tax for garment makers on the cards. The Daily Star, Feb. 1.

Stephenson M. 2013. From sweatshop to smartshop: How Asia-Pacific countries can use the

lessons of the garment industry in Bangladesh and Cambodia as a driver for inclusive growth. A

report prepared for UNESCAP Trade and Investment division.

Sturgeon T.J. 2002. Modular production networks: A new American model of industrial

organization. Industrial and Corporate Change, 11(3): 451-496.

Sun Q. 2016. The analytical model of country resources, country image, and foreign direct

investment: The country branding implications. In Celebrating America’s Pastimes: Baseball, Hot

Dogs, Apple Pie and Marketing? Proceedings of the Academy of Marketing Science.

The Sun. 2016. Sweatshop ‘slaves’ earning just 44p an hour making ‘empowering’ Beyonce

clobber. The Sun, May 7.

The Textile Think Tank. 2014. Top World Players in the Trade of Raw Cotton.

http://www.thetextilethinktank.org/top-world-players-in-the-trade-of-raw-cotton/

Tokatli N. and Kizilgun O. 2004. Upgrading in the global clothing industry: Mavi jeans and the

transformation of a Turkish firm from full-package to brand-name manufacturing and retailing.

Economic Geography, 80(3): 221-240.

Tokatli N. and Kizilgun O. 2009. From Manufacturing Garments for Ready to Wear to Designing

Collections: Evidence from Turkey. Environment and Planning, 41: 146–62.

Tricoire J.P. and Clayton A. 2015. Advantage: Supply chains. In Growing Global: Lessons for the

New Enterprise. The Center for Global Enterprise, New York, NY.

95

UNCTAD. 2013. Global Value Added Chain and Development. United Nations, Geneva

UNIDO. 2015. Global Value Chains and Development. UNIDO, Vienna.

US Congress Joint Economic Committee. 2015. The Economic Impact of the Fashion Industry.

Feb 6.

Vogel D. J. 2006. The Market for Virtue: The Potential and Limits of Corporate Social

Responsibility. Brookings Institution Press, Washington, D.C.

Wind Y., Fung J. and Fung W. 2009. The network challenge, strategy, profit, and risk in an

interlinked world. In Kleindorfer P.R. and Wind Y. (Eds.), chapter 17.

Yee A. 2015. Labor Unions Gaining Ground in Bangladesh Garment Industry. Voice of America

(VOA): Asia. May 1.

Yen B. 2016. Uniqlo: A supply chain going global. Asia Case Study Research # HK1085.

Yunus M. and Yamagata T. 2012. The garment industry in Bangladesh. In Fukunishi (ed.),

Dynamics of the Garment Industry in Low-Income Countries: Experience of Asia and Africa.

Chousakenkyu Houkokusho, IDT-JETRO.

Zaid B. and Monzur H. 2014. Workplace safety and industrial relations in the export oriented

Readymade Garments (RMG) industry in Bangladesh. Bangladesh Institute of Development

Studies, Dhaka.

96

Appendices

Appendix 1. Profiles of the World’s Largest Apparel Firms

5-year average (2011-2015)

Pre

sen

ce i

n

Ban

gla

des

h

Home

country

(HQ

location)

Ultimate

owner

(if

different)

Revenues

Mil. US$

Growth,

% annual

revenues

Assets

Mil.

US$

Full Time

Employees

N

Part Time

Employees

N

American Eagle yes US 3,226 3.81 1,795 6,880 33,420

Coach US 4,599 1.96 3,234

GAP* yes US

15,489 1.57 7,499 136,000

Levi Strauss yes US 4,660 1.10 3,074 12,100

Lululemon US 1,294 24.25 967 6,602

Michael Kors yes US 1,899 60.46 1,145

Ralph Lauren US 6,728 9.90 5,476 18,400 9,333

Hilfiger

yes

US

PVH

Corp.

Under Armour US 2,537 28.11 1,724 3,420 5,220

Benetton** yes Italy 1,340 2,012

Burberry UK 4,735 3.95 2,058

Hugo Boss yes Germany 3,723 0.75 1,963

Mango*** yes Spain Punto Fa 1,782 12.25 3,538

Next yes UK 8,374 (2.76) 4,627

Esprit

Hong

Kong/US

409 120.46 2,405

H&M yes Sweden 2,592 163.80 9,501

Uniqlo

yes Japan Fast

Retailing

Zara yes Spain Inditex 362 (4.26) 1,150

Summary statistics (of the above)

Average 5,199 23.51 3,261 30,567 15,991

S.D.s

5,370.43

46.49 2,506.

62 51,918.24 15,233.34

IQ Capital database; companies’ reports

S.D.s is the method of calculating the standard deviation for a sample of the whole population

Empty cells = n.a.

* Throughout the report, data for GAP include GAP, Old Navy and Banana Republic

** Throughout the report, data for Benetton are for 2011 only

***Throughout the report, data for Mango are for 2011-14

97

Appendix 2. US Wages, Selected Fashion and Apparel Occupations

US Bureau of Labor Statistics, Occupational Employment Statistics http://www.bls.gov/soc/home.htm As of May 2015

131,470

126,280

82,730

74,440

72,940

63,310

54,120

51,270

51,190

41,410

ART DIRECTORS

ARTISTS AND RELATED WORKERS

FASHION DESIGNERS

ART AND DESIGN WORKERS

DESIGNERS

PUBLIC RELATIONS SPECIALISTS

FABRIC AND APPAREL PATTERNMAKERS

GRAPHIC DESIGNERS

SUPERVISORS RETAIL SALES WORKERS

MISC. TEXTILE APPAREL AND FURNISHINGS WORKERS

Annual wages, US average $

98

Appendix 3. Custom Clearing Cost for RMG Products*

MFN duty rates

%

Import VAT

%

Europe

Austria 12 20

Denmark 12 25

Finland 12 24

France 12 20

Germany 12 19

Greece 12 24

Italy 12 22

Netherlands 12 21

Norway 10.7 25

Spain 12 21

Sweden 12 25

Switzerland 0 8

UK 12 20

Japan 7.4 8

US 25.9 Varies by state

http://www.dutycalculator.com/dc/242529/clothes-for-men/t-polos/shirts-of-woven-man-made-fibres/import-duty-

rate-for-importing-readymade-garments-from-india-to-united-kingdom-is-12/

*HS commodity code 6205.30.0000

99

Appendix 4. Size of Lead Firms’ Global Retail Networks

Selected Leading Apparel Companies, 5-year average (2011-2015)

Total retail

sq. ft.

Number of stores

(of which owned/operated)

Ralph Lauren 657 (416)

Michael Kors 785,971 327 (327)

Lululemon 1,065,000 235

GAP 37,520,000 3,433 (3,129)

Levi Strauss 1,856 (656)

Coach 935 (935)

American

Eagle

6,343,715 1,188 (1,062)

Under Armour 191 (191)

Esprit 124 IQ Capital database

100

Appendix 5. Retail Rental Prices, World’s Major Cosmopolitan Centres

Own calculation based on data from:

http://www.statista.com/statistics/431702/prime-rents-retail-areas-europe/

http://www.statista.com/statistics/321066/annual-rental-cost-of-prime-retail-rents-in-the-united-kingdom-uk/

http://www.cushmanwakefield.com/en/research-and-insight/2015/main-streets-across-the-world-2015/

19,77317,467

11,605

8,836 8,658 8,599 8,500 8,000 7,456 6,993 6,8985,751 4,873 4,132 4,100

€/sq.m./year

101

Appendix 6. Corporate Tax Rate Paid

World Largest Apparel Companies*, 5-year average, 2011-2015

Effective Tax Rate

%

American Eagle 38.98

Burberry 26.04

Coach 31.97

Esprit 52.78

GAP 38.71

H&M 23.75

Hugo Boss 23.67

Levi Strauss 31.06

Lululemon 33.10

Michael Kors 37.43

Next 23.39

Ralph Lauren 30.67

Under Armour 38.36

Uniqlo 37.43

Zara 34.17 IQ Capital database

*All firms for which tax data are available.

102

Appendix 7. Case Studies of Successful Garment Manufacturers in Bangladesh

Firm1: Misami Garments

Misami was established in 1984 in with one factory. Now they have four factories, located in

Dhaka, Manikganj, Adamjee and Comilla. This firm has both sewing and washing units. It sews

and washes 2 million pieces of denim and non-denim bottoms and 500 thousand outerwear a

month. Productivity rose from 100,000 pieces per month at the beginning, to the current 2.2 million

per month. The table below shows the growth of the company in terms of employment:

This is a family-owned business, set up by Reza Ali (Group Chairman) in the year 1984. The

current managing director, Miran Ali, and deputy managing director, Mishal Ali, are sons of Reza

Ali. They became involved in the business after completing their education abroad. They aspire to

sustain high-quality standards in their factories and increase the number of factories while

maintaining the standard. Out of four factories, currently two are Leadership in Energy and

Environmental Design (LEED) Platinum factories with the highest score in the world.

The success of this firm lies in their risk-taking capability, quality of products, sound organization

structure and investment in technology. Lunch is not provided by the enterprise, but lunch

allowance is provided to all. All workers are also provided with a transportation allowance.

According to this firm, the factors which make an RMG firm successful include production and

capacity planning, IT support and structured organization. This is a compliant factory, but still they

are price takers, where price is determined by the buyers. However, their relative position in the

market gives them an ability in terms of setting prices. Their position is better than many others.

According to this firm, buyers will not take into account currency fluctuations; nor should they be

asked to. However, buyers can ensure stability of orders with month-to-month variance; being

more stable is their greatest point.

Firm 2: Tusuka Garments

Tusuka has been in the garment business since 1997, started as a buying house named Texel and

focused only in the woven market. With a vision of specialized denim/jeans-making, in 2001

Tusuka started its venture as a jeans manufacturer with only two sewing lines and a small washing

unit, to seek opportunity in the globally growing demand for denim garments. After a year,

management found it necessary to have an advanced washing section to fulfil the vision. Therefore,

from 2003, the company started to expand, adding the washing and new sewing lines into its

compound. Now Tusuka has a washing capacity of 60,000 pieces per day and a total of 44 sewing

lines specialized in denim garment making.

The factors that contributed most to their success are better technical know-how of management

in the production process; product and market specialization (i.e., only jeans and mostly for the

Europe market); quality and commitment; maintaining proper working condition and compliance;

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total number of

employees 4,250 4,300 4,010 4,044 4,454 6,725 7,520 7,758 10,584 11,616

103

good research and development and a good marketing team that does research on fashion, trends,

washing, chemicals and other trends and is supported by the latest machines and technologies. The

company’s management is passionate about fashion jeans manufacturing, and the main focus of

the company is on fancy washes with optimum quality and delivery.

Tusuka incorporates the latest washing technologies, chemicals and machineries in washing. It

also integrated a dedicated R&D department to learn and implement new washing techniques to

match the trends. To ensure quality, they keep advanced sewing machineries in the production line

and a dedicated quality team for individual buyers/brand. The in-house garment testing laboratory

is able to meet the basic testing requirements. They are dedicated to offering the best product to

their buyers. With Tusuka, quality and service can be seen. A higher retention of employees is an

indication of their success and also a critical factor that helps them growing steadily. The corporate

philosophy of upper management leads to better employee relations, and higher satisfaction is a

reason of such high employee retention.

The situation is mixed in terms of price determination. With some buyers, this firm is a price

maker, while in some other cases, they are price takers. There are even buyers who follow both

approaches simultaneously. For example, a buyer may retail both basic and premium products. For

basic products, they offer it to manufacturers mostly on a volume term at a price set by the buyers.

This same customer also works with other manufacturers who produce higher quality or premium

products with a good reputation and commitment, and in these cases, prices are set by

manufacturers in partnership with buyers.

Tusuka only works with customers who have an attitude of partnership, who will stand beside

them in good and bad times, and they reciprocate in similar situations. Of course, they understand

the challenges and limitations of situations like a retail market slowdown at the customers’ end

leading to demand and price spirals or cost hikes, but they don’t work for customers who tend to

take advantage of situations. There are number of customers who follow the price-squeezing

practice on any excuse, but, according to Tusuka, they do not outnumber those buyers with a

partnership attitude: 70% of the buyers are good, and 30% seek opportunities to take advantage of

manufacturers. This entrepreneur has excellent relationships with their customers; they are their

partners, and they receive a partnership attitude from buyers in troublesome times to share

unforeseen cost burdens. They also support their customers when there is turbulence in the retailing

end.

Firm 3: Pacific Jeans Limited

Pacific Jeans is a world-class casual wear manufacturing company known for its state-of-the-art

production facility, extensive and unique research and development centre and highly skilled

human resources which have transformed a small garment factory, established in 1984, into a

supreme institution of premium jeans design and a manufacturing house. At present, Pacific Jeans

Limited is one of the leading premium jeans manufacturers, employing 22,000 people, producing

over 30 million jeans every year and exporting to over 25 countries. Pacific Jeans Group has a

cutting capacity of over 100,000 pieces of garment everyday across all production units. Pacific

Jeans Group has the laundry capacity of over 100,000 pieces per day, out of which 20-25% are

104

value-added garment dye products. Pacific Jeans Group has a finishing and packing capacity of

over 100,000 pieces per day.

The differentiation of this firm lies in its high value-added items, development of new processes,

their own sample development/collection capability, excellence in quality assurance and

maintaining appropriate working standards in their facility. To ensure these differentiations, they

place a high priority on human resources development and management, particularly in the mid-

management level of each and every department. To deliver at a premium market segment and to

ensure quality products with sophisticated product detailing, they always work and invest on

technology upgrading. Pacific Jeans Innovation Centre is continuously experimenting in

innovative fits, finishes, fabrics and design development in denim. Their collaboration with highly

regarded designers from US, EU and Japanese brands has contributed in a special way to

establishing them not only as a world-class manufacturer but also as a supreme denim and casual

design solutions company. In summary, the combination of HR management, technology

upgrading, quality assurance, value addition and product detailing, and workplace standard

maintenance make up the key success factors.

Pacific Jeans works on both volume-based segments and high-end items, so they are a both price

taker and a price setter. Though in the market they are predominantly a price taker and are quite

habituated with such a business model, their capability to develop their own collections as well as

produce high-end product-detailing with top-class quality assurance and consistency gives Pacific

Jeans the edge to set price together with their partners/customers.

In general, it is manufacturers who absorb the impact caused by market fluctuations, such as those

in currency exchange rates, wage increases, and other market forces. In a few cases, however,

buyers who have long term relationships share the pressure caused by such market forces.

However, in the case of Pacific Jeans, the customers listen to them, they partner with them and

share such business impacts because together they believe in a win-win partnership rather than a

‘give and take’ approach.

105

Appendix 8. Expenditure on Apparel, % Total Consumers’ Expenditure

8a. US (Apparel as % of Total Consumer Expenditure)

Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, various years. http://www.bls.gov/cex/csxmulti.htm

8b. Europe (Weight of Clothing in the Total Consumer Price Index)

EUROSTAT Harmonized Indices of Consumer Prices (HICP) http://ec.europa.eu/eurostat/web/hicp/data/main-tables

0%

1%

2%

3%

4%

5%

6%

7%

1985 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

45

50

55

60

65

70

75

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

EU Euro area